Planning with Personal Insured Annuities - Potential impact of the new draft legislation

On December 17, 2014 the draft legislation that would implement changes to modernize the exemption test and other life insurance policyholder taxation rules, including the rules for the taxation of prescribed annuities, received Royal Assent becoming law.

The new rules state that annuities issued after 2016 that are prescribed annuity contracts, will have to use an updated mortality table to calculate the capital portion of each annuity payment. The prescribed table for those annuities will be the Annuity 2000 Basic Mortality Table of the Society of Actuaries. This change will result in an increase of the taxable portion of annuity payments from a prescribed annuity contract.

THIS EXAMPLE HIGHLIGHTS THE POTENTIAL IMPACT THE NEW MORTALITY TABLE

WILL HAVE ON INSURED ANNUITY BENEFITS:

CLIENT INFORMATION: Female, 73, Healthstyle 3 FUNDS AVAILABLE: $500,000

PERSONAL TAX RATE: 45%

As you can see, the new rules will impact the Insured Annuity concept, resulting in a net cash flow decrease of more than 10%. Fortunately, there is a bit of time before the new rules take effect and we are working on alternative structures and products so that after 2016 we have a solution that provides a similar level of benefit as the current Insured Annuity concept.