Life insurance is an attractive tool for estate
planning because the proceeds received at death are generally
not subject to tax. If you have, or are planning to purchase
life insurance, you should be aware that the tax implications
will depend on whether it is "exempt" from taxation
of the accumulated income or "non-exempt."
Policies issued before Dec. 2, 1982 fall under the "old
rule" status. These policies are exempt from accrual
taxation. Policies issued after Dec. 1, 1982, fall under the
"new rules" and may be exempt or non-exempt.
To distinguish the exempt or non-exempt status of a policy,
an exemption test must be administered by the insurance company
on each anniversary date of the policy. A policy is considered
exempt if its emphasis is "benefits on death." Non-exempt
policies are those policies that offer a substantial lifetime
investment including annuity contracts. Exempt policies must
meet current test requirements and must also meet prospective
test requirements for future anniversaries. You can obtain
information about the tax status of your policy from your
The exempt status of a policy can change for a variety of
reasons and each has different consequences. An exempt policy
that does not meet the exemption test is then granted a 60-day
grace period to return the policy to its exempt policy status.
In most cases, this requires withdrawing money from the policy.
The tax on non-exempt policies must be paid at least every
three years. Holders of policies acquired after 1989 must
pay tax annually. If you are insured under a non-exempt policy,
then upon your death investment income generated from this
policy that has not yet been taxed will be considered taxable
income. The proceeds received on death from an exempt policy,
including the income earned under this policy, are not taxable.
Tax may also be payable if you transfer ownership, relinquish
or convert your policy. Dividends and policy loans may also
have tax consequences that should be looked at carefully.
Exercise extreme care when replacing any policy, particularly
an "old-rule" policy, because the tax outcome may
The rules and regulations surrounding life insurance policies
and taxation change over time. You should talk to your insurance
or financial advisor before making any decisions regarding
your policy. Members of the Canadian Association of Insurance
and Financial Advisors (CAIFA) have the specialized training
essential to help you make the right decisions