Did you know that the 250% exempt testing rule applied to Universal Life contracts in Canada expires at age 85? The Canadian Income Tax Regulation #306 subsection 4b speaks to this. In short, exempt testing which applies to all Universal Life contracts starting in the 10th year (see http://www.insuranceknowhow.ca/the-250-rule-surprise) caps the amount of tax sheltered growth of funds by ensuring that the fund growth does not exceed the fund value in the 3rd year pervious. e.g. the value of the funds in the 10th policy year cannot exceed 250% of the funds value in the 7th year. This exempt testing or application of the 250% rule is required only to the date the life insured attains age 85 years of age.
If we think about the fact that the Maximum Tax Actuarial Reserve (MTAR) is based on an endowment at age 85 this makes perfect sense.
Why? Because an endowment contract is designed to have the guaranteed cash value equal of the amount of the death benefit at the age specified e.g. 85. So instead of the death benefit being paid out tax free to the designated beneficiary, it is paid out in a tax free lump sum to the owner (usually the same as the life insured) of the contract.
In summary, once the contract has matured (been paid out) there is no insurance contract left and therefore no cash accumulation or MTAR to test against, hence the expiration of the 250% exempt test requirement.
Cheers, Helena
p.s. Today is your last chance to register for Insurance Know-How training in Vancouver on September 15th! Click http://www.insuranceknowhow.ca/life-insurance-training.
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Tags: 250% Rule, beneficiary, MTAR, universal life
Helena Smeenk Pritchard
Helena Smeenk Pritchard has over 36 years of experience in the insurance industry and is the Principal of Helena Smeenk Pritchard & Associates, a leader in “Insurance Know-How” training. Helena has had articles published in Advocis’ Forum Magazine as well as Advisor’s Edge, and is a very popular columnist for Advisor.ca.
