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of insurance financing strategy. On a $5-million policy, total tax deductions of $765,600 ($1.32 million of premiums paid x 58%) would be available during the first 20 years. At a 45% tax rate, the tax savings would amount to $344,520. Aſter 2016, the tax savings will only be $243,000, a maximum


of 39% of the total premiums paid during the same time frame. In addition, due to the rule changes, it is estimated that Joe’s annual premium will also be about 5% higher. In other words, reduced savings at a higher cost. It’s not all bad news. The immediate financing of life policies


can still provide interesting benefits. And aſter 2016, though their longer-term growth will be slightly less tax sheltered, participat- ing whole life policies will potentially have higher early cash values and thus more initial collateral value. In a limited number of situations, deferring life insurance


planning until after 2016 might actually benefit clients. For example, for individuals subject to substandard health ratings on their life coverage, the net cost of pure insurance may actually be higher under the new rules. This will lead to increased deduc- tions from immediate finance strategies and earlier capital divi- dend account benefits.


Strategy neutralized The taxation of prescribed annuities will also change and that will neutralize the insured annuity, a popular strategy for clients over the age of 65, which involves the purchase of a life annuity in order to generate a guaranteed income for life. Concurrently, to preserve the capital that has been invested in the life annuity, the client would acquire a permanent life insurance policy with a death benefit equal to the amount invested in the life annuity. The annual cash flow from the annuity is used to finance the annual premium cost and provide the client with a net aſter-tax income that could oſten generate, depending on the age of the


44 | CPA MAGAZINE | DECEMBER 2015


client, a pre-tax annual yield above 7%, guaranteed for life. At the time of death, the annuity income will cease and the client’s origi- nal capital would be returned to his or her estate via the life insur- ance death benefit. When 2017 hits, the attraction of such a strategy will be


noticeably reduced. Investment income tax increases will likely affect the prices of guaranteed level cost life insurance products and increases in the taxation of prescribed annuities will reduce overall net yields (see graph above). For example, as the graph illustrates, a 65-year-old male will see his tax-free annuity income go down by 11%. Ultimately, aſter 2016, the strategy will likely provide a lower overall return to your clients.


Window of opportunity “Insurance” and “audit” are not an entrepreneur’s favourite words. However, in 2016, an insurance audit could produce the kind of major tax savings likely to prompt your clients to actu- ally suggest meeting more oſten. Working collaboratively with CPAs, lawyers and portfolio managers, an insurance adviser can determine if a client should consider implementing a strat- egy before December 31, 2016, or, in limited cases, aſter that date. Professionals should also ensure that existing life insur- ance policies are held in the right entities and are eligible for grandfathering. A best-before date is now stamped on a host of popular insur-


ance strategies. The lead time before the new rules kick in offers a unique planning window for professionals and their clients. In the coming months, we invite you to party like it’s 1982.


ANDREW GUILFOYLE, CPA, CA, CFA, and ADAM SHAPIRO, CPA, CA, CFP, CLU, TEP, are partners with Guilfoyle Financial Inc. ZACHARY SCHWARTZ is an associate adviser with Guilfoyle Financial Inc.


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