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Recently, I became aware of a transaction that represents an opportunity for others to consider. As you are probably aware, the impact of lower interest rates has caused many older universal life policies to become quite valuable from an actuarial/fair market value perspective, and this has created a tax advantaged opportunity for individuals who are able to transfer those policies to a holdco or opco.
However, a second potential factor that can have as much impact – or more – is insurability. This is what happened in the recent transaction, (not my client).
An older individual was insured for $5 M, 10 year term insurance; the policy was held personally. The client contracted an illness considered to be very serious but not likely to result in an immediate claim.
The illness, from an insurance underwriting perspective, caused the individual to become uninsurable. However, the term contract could expire before the individual’s likely death therefore the impact on value was not substantial. So, the policy was converted to term to 100, making the death benefit a certainty, not just a probability/possibility. Because of this, the actuary was then able to establish a value of just over $2.5 M for the policy. This enabled the client to transfer the contract to his holdo for a price of $2.5 M, taking back a promissory note of $2.5 M, which will be paid out tax free.
Importantly, the ACB of the policy transferred to the holdco is very low because the ACB of the original policy is deemed to be the holdco’s ACB. Therefore the capital dividend available on death will still be close to the full $5 M. Further, premiums paid for the term to 100 policy will be paid out of after tax corporate income, not after tax personal income.
There may be circumstances where this strategy doesn’t work as well and we always recommend a proper review before any contract is transferred.