The Department of Finance Canada took an interest in leveraged life insurance strategies late last year. It came out with a proposal to address 10/8 arrangements in the 2013 Federal Budget in March, shortly after which companies reportedly stopped offering them to new clients, pulling back to re-evaluate their options.
Just days after the government followed up, releasing draft legislation in September, PPI, the parent company of PPI Advisory, and PPI Solutions, announced it was making a new life insurance managed account available with a revised loan program. The new accounts are intended to be a “compliant” answer for clients with existing 10/8 arrangements in place, and for new clients interested in the strategy, as well.
In a 10/8 arrangement, the taxpayer invests funds in a life insurance policy. He then borrows an equivalent amount and the loan is secured by the policy or by an investment account in respect of the policy. The taxpayer then invests the borrowed amount in income-producing assets so that interest paid or payable on the amount borrowed is deductible for tax purposes (See April 2013 edition of The Insurance and Investment Journal).
James Burton, chairman and CEO of PPI insists the 10/8 was never intended for use as a strategy to create an unfair tax advantage, or that it would ever make sense to exclusively use it as such.
“It was never sold, in our minds, as a gizmo investment,” he says. “I can’t imagine anyone buying it that simplistically. If they only did it for that reason (for the resulting tax benefits), I would question why they should have done it in the first place. Most of our clients, that we’re aware of, bought it because they need the insurance.”
A special bulletin released by the Conference for Advanced Life Underwriting (CALU), says the draft legislation appears to address concerns raised by the organization in a submission it filed with Finance, in response to the budget, last May.
“I think there is evidence in the draft legislation, the language is very clear, the Finance Department respects the fact that people purchase life insurance, that some will borrow, and that’s appropriate. What they want to be able to see is that the rate being credited inside the policy account will be based on its own merit.”
To be a compliant policy, PPI says interest rates credited annually to the policy investment accounts will not be determined by loan rates, and policyholders will be allowed to invest in the policy investment accounts, without being required to borrow.
“We respect the position of the Department of Finance,” Burton says in the company’s press release, “and we have worked with insurers to amend their policies and loan agreements in a way we believe protects the interest of clients, complies with the draft legislation, and allows for an orderly transition.”
In discussion about the policies, he says there are no grandfathering provisions in the legislation, nor were they asked for. Finance has, however, made good on its promise to allow anyone with an existing 10/8 arrangement in place, to wind up the policy without tax consequences, before the end of the year. As for concerns about surrender charges, he says PPI’s product never included surrender charges in the first place.
Burton says PPI invented the 10/8 concept initially, almost 10 years ago with the help of two carriers. “There are two or three others who may have applied some of the ideas, but I think most of the insurers, after the March 21st legislation came out, did not continue to make the 10/8 loans available.”
Although the credits remain in place for those who invest in the new compliant policies, with rates set by the market, and resulting credits that are notably lower today than they have been in the past, it remains to be seen if the policies will still be beneficial enough to the high-net-worth clients who bought them in the first place.
“That’s a broader question,” Burton says. “There’s no question the crediting rate inside of the account will be lower. Each client, with their advisor, will have to look at their overall planning and decide if it’s still valuable. We start off first with the fact that the client needs insurance.”