PPI has a new life insurance policy managed account option and revised loan facility to comply with draft federal legislation that impacts certain leveraged insurance arrangements previously referred to as 10/8 programs.
The budget proposes to eliminate the deductibility of interest paid as part of 10/8 arrangements, eliminate the deductibility of premiums paid for policies assigned in support of such arrangements, and to restrict the credit to a corporation’s capital dividend account for corporate-owned policies.
The draft legislation and explanatory notes provide clarity on what will and won’t be considered a ‘10/8’ policy. To comply with the new rules, a policy must meet the following conditions:
- The interest rate credited annually to a new policy investment account will not be determined by reference to the interest rate charged on a loan
- Policyholders will be permitted to invest in all policy investment accounts without being required to borrow
The objective of the new managed investment account is to achieve superior longer-term gross returns while reducing the amount of yield volatility experienced by policyholders.
Read: How new dividend tax rules affect biz owners
The investment philosophy and yield smoothing process will be similar to those used with par funds managed by life insurers. The new managed accounts will be available to all holders of these policies, whether or not a loan is ever taken. Clients can also borrow using either a policy or collateral loan based on the security of the policy. The loan rate is based on the return of the managed account plus a spread.