Frequently asked questions about the 2017 tax changes affecting Universal Life policies

Why are the tax changes taking place now?

Created in the 1980s, the current legislation governing the tax treatment of life insurance policies could not possibly have anticipated all of the features added to new generations of products, particularly universal life (UL) products. To help modernize the rule, the Department of Finance has been working with the insurance industry over many years to update the legislation and it is now ready to be put into effect.

The new legislation will affect life insurance policies issued after December 31, 2016.

Will my client be affected by the changes if the policy was issued before January 1, 2017?

Existing policies are “grandfathered”, meaning that they are not affected. However, this grandfathered status can be lost and the policy can, in fact, be affected by the new legislation if your client makes certain changes to their policy after December 31, 2016.

How does “grandfathering” work?

When tax legislation changes, usually in-force policies are unaffected by the changes. These in-force policies are said to be grandfathered. There are two types of policies with grandfathered status.

  1. G1 – Tax rules applied to policies last acquired prior to December 2, 1982
  2. G2 - Tax rules applied to policies issued after December 1, 1982 and before 2017 or those policies that lost G1 status

G3, or the change that will occur on January 1, 2017, refers to policies issued after 2016 or those policies that have lost G1/G2 status so that the new tax rules will apply.

Why would a policy lose grandfathering status?

Generally a policy will lose grandfathering status if any life insurance is medically underwritten on or after January 1, 2017 and is added to the existing policy. Also, a term policy issued before 2017 will lose its grandfathered status if it is converted to a permanent policy after 2016.