Adjusted cost basis (ACB)
The ACB is the adjusted cost basis of a life insurance policy. It is used to determine the taxable gain upon withdrawal from a policy and to calculate the credit to the capital dividend account (CDA) of a private corporation upon death of the insured. The new legislation changes a few elements and adds new elements to the ACB.
Net cost of pure insurance (NCPI)
Generally, the ACB of a policy is increased by the premiums paid and reduced by the cost of insurance, referred to as the Net Cost of Pure Insurance (NCPI). The changes to the legislation result in a reduction in NCPI. Generally speaking, this will result in a higher ACB which will be beneficial for policyholders who surrendered their policies. The reduction in NCPI may also result in a lower tax deduction for life insurance policies assigned as collateral for a loan.
Currently the calculation of the ACB does not include the effect of substandard ratings. After December 31, 2016, the ACB calculation will include the effect of substandard ratings. This means the ACB for life insureds who are rated will be higher in the initial years but will be decreased in the later years.
Fund value (FV) payout on multi-life UL policies
A multi-life UL policy provides insurance coverage to different life insureds under one policy. Currently these policies will payout the full fund value on the death of any of the insureds tax-free and without reduction to the ACB of the policy. The new legislation limits the tax-free fund value payout to the amount of the fund value had the deceased insured originally had a single life insurance policy. Further, the tax free fund value payout will reduce the ACB, therefore, any subsequent fund value payout from the multi-life policy could result in a tax liability.