Insurers suspend their 10/8 programs preventively

By Alain Thériault | June 18 2013 08:11PM

The federal Finance Minister’s decision to curtail the tax benefits of the front-end leveraged insurance program (10-8) has led insurers to suspend sales of the universal life insurance product offered for this purpose. BMO Insurance and Transamerica Life Canada have suspended sales of universal life designed for the 10-8 strategy. These insurers are reacting to the proposal in the latest federal budget to enact a law that would eliminate the tax benefits of the 10-8; it would take effect on January 1, 2014.

Originally, the 10-8 concept involved contracting an investment loan bearing 10% interest and investing in a universal life insurance policy with a guaranteed rate of return of 8%. Clients could then generally deduct the taxes on the loan interest at a marginal rate of 50% and obtain added value (8% less a real lending rate of 5%).

BMO Insurance says it is withdrawing its program to give it time to evaluate the effect of changes proposed by the Jim Flaherty Budget. BMO will “provide an update, as details are finalized.”

Transamerica told its advisers that they need not take steps regarding the 10-8 strategy, for now. “There are no changes to how we administer our policies,” the insurer confirms, adding that “this is a budget proposal and it could be refined before it is passed into law.”

It is actually the final rules that are presently shaking up the 10-8 market. Steve Carter senior vice-president, marketing, BMO Insurance confirms that consultation took place between the industry and the federal Finance Minister on this topic.

“CHLIA is in discussion with the Finance department, presenting views on [10-8]]. It’s an opportunity to provide them with feedback on the future regulation for the in-force business, e.g. how existing 10-8 will be treated or if it will be grandfathered,” Mr. Carter says.

The Conference for Advanced Life Underwriting (CALU) is also appearing before the Finance Minister and the Canada Revenue Agency, CALU member and, PPI vice-president, Québec, Claude Ménard confirms. “We are trying to change the projected dates for the transition,” he says.

A client who buys a policy to end the 10-8 by the prescribed deadlines, and whose funds that accumulated in the policy have a taxable surplus (over the adjusted cost basis) will receive tax relief from Ottawa. “It’s a tax credit equivalent to the amount of taxes they would've had to pay on the surplus,” explains Mr. Ménard.

In fact, the transition rules to the new law are not yet known. “If they are announced only in September that will give clients only three months to evaluate the situation. It’s not enough. We are asking the government to move the deadline past December 31, 2013,” Mr. Ménard says.

PPI, designer of one of the 10-8 programs that garnered the bulk of the Canadian market share, lost two suppliers: BMO and Transamerica. Industrial Alliance and RBC Insurance are still selling a universal life insurance product adapted to the 10-8, Mr. Ménard continues.

Mr. Ménard points out that “The new law does not mean that the leverage loan based on the policy’s surrender value will disappear. We're working with insurers to offer interesting leverage options with policies placed as collateral guarantees with banks,” Sales of 10-8 will continue until December 31. “PPI has 1,200 clients with a 10-8 arrangement. Not a single one has changed anything to date. Clients who borrow and use their funds wisely can still deduct interest expenses. In addition, insurance contracts sold under 10-8 are based on an insurance need that the changes are not questioning,” Mr. Ménard says.

Cathy Preston, vice president, Life and Health, RBC Insurance says, “We understand that a number of the insurance industry providers of this type of structure are actively exploring revised policy options that might be offered to existing '10/8' clients and which, if accepted, should permit their policies and loan arrangements to comply with the budget proposals after 2013. We can confirm that RBC Insurance is active in this area as well, working in conjunction with PPI Advisory.”