Is it Possible?
This question has undoubtedly been asked of every financial expert at some point in their career. Many individuals need clarification about the answer, leading to confusion and misinformation.
Typically, life insurance premiums are not considered deductible expenses. However, a deduction may be permitted under specific conditions for the lesser of the Net Cost of Pure Insurance (NCPI) and the premium amount.
To be eligible for this deduction:
1)The policy owner and borrower must be the same taxpayer. So for some IFA strategies where the borrower is a shareholder, and the policy owner is the corporation, this will disallow the deduction.
2)The life insurance policy must be assigned to a restricted financial institution, which includes major banks, insurance companies, trust companies, and credit unions, as part of a borrowing arrangement with the institution.
3)The interest on the loan must qualify for a deduction. This means you must leverage the money into capital assets or a business.
4) A life insurance policy assignment must be explicitly required as collateral for the loan. A legal obligation to assign the policy is essential, and the assignment cannot merely function as a means to obtain an interest deduction. It’s vital that a client maintain thorough documentation and involve a Certified Public Accountant (CPA) from the beginning.
However, I would like to point out that financial institutions rarely require the collateral assignment of insurance policies for credit approval, except for substantial corporate loans and operating lines. Consequently, this requirement is a significant barrier for most individual clients seeking to claim deductions on life insurance premiums, making the likelihood of such deductions highly improbable outside of a corporation.
Furthermore, the Canada Revenue Agency (CRA) asserts that insurance contracts without a designated premium, such as universal life policies, do not possess a contractual obligation. As a result, the CRA does not consider the premium as “payable” when paid via policy cash values. In these cases, borrowers should pay an annual premium at least equal to the Net Cost of Pure Insurance (NCPI) to optimize their deduction potential.
It is essential to note that a prorated deduction must be implemented when the life insurance amount assigned as collateral exceeds the loan amount. For instance, if the insurance amount is $5 million and the loan amount is $500,000, the client may only be eligible to write off 10% of the lesser of the Net Cost of Pure Insurance (NCPI) and the premium amount. Consequently, the resulting deduction amount will likely be minimal and negligible for younger clients.
Again, always talk to a financial planner and CPA before implementing complex tax and financial strategies.