One of the providers of the leveraged insurance arrangements that were targeted in the 2013 federal budget says it is exploring the best options for clients who currently have the arrangements in place.
Toronto-based PPI Financial Group Inc., a marketer of insurance solutions, acknowledged on Monday that measures in the federal budget will affect the so-called “10/8” leveraged insurance arrangements that PPI sells.
The 10/8 plans, typically used by high net-worth individuals and their corporations, involve the purchase of a life insurance policy, and the subsequent use of that policy as collateral to borrow funds for other investment purposes. Policyholders are able to deduct the interest they pay on the loan, thus generating a considerable tax benefit.
Measures in the federal budget aim to prevent the arrangements from being used in the future, by making it punitive for clients to continue with the program.
Budget 2013: Key changes for 10/8s and leveraged annuities
Specifically, the budget proposes to, after 2013, eliminate the deductibility of interest paid as part of a 10/8 arrangement, eliminate the deductibility of premiums paid for policies assigned in support of 10/8 loans, and restrict the credit to a corporation’s capital dividend account where these policies are corporate-owned.
“We have always believed that the 10-8 plans meet life insurance and financing needs for individuals, their families and businesses in an economically effective manner,” said James Burton, chairman and CEO of PPI. “We plan to actively participate in discussions between the industry and the federal Department of Finance concerning the proposals to ensure that they are in the best interests of consumers.”
Clients have until the end of the year to unwind their existing 10/8s, before the tax benefits associated with the arrangements begin to be denied. PPI said it has begun determining the best course of action for clients with existing 10/8 arrangements.
“Our role is to work with our advisors to help protect the interests of their clients, and we have begun the process of assessing the best options for those clients that will continue to meet their very fundamental and critical need for insurance and liquidity,” said John McKay, executive vice president and actuary at PPI. “Canadians are well served by planning ahead and our key focus is on delivering the highest calibre of estate planning.”
PPI has been active in the high net-worth insurance market for more than 30 years. Its 10/8 policies are provided in collaboration with RBC Life Insurance Co. of Mississauga, Ont. Other active players in the 10/8 market include Toronto-based Transamerica Life Canada Inc., Toronto-based BMO Life Assurance Co. and Quebec City-based Industrial Alliance Insurance and Financial Services Inc.
PPI noted that other forms of leveraging and the use of life insurance policies as security for loans are not affected by the proposals and continue to be a viable means to access liquidity.