Regulation 306 of the Income Tax Act requires insurance companies to test all Universal Life (UL) policies at the end of their 10th policy year. The Cash Surrender Value (CSV) at the end of year 10 and any subsequent policy anniversary will be compared to the CSV at the end of the 3rd preceding policy anniversary.

If the growth in CSV in the 3 year period exceeds 250% (2.5 times), the policy FAILS the test. The Insurance company is then required to change tax age of the policy to that of a 3 year old plan.

It is our understanding that the Insurance Company will test prior to the policy's 10th anniversary and provide a course of action should your policy fail. There is no grace period for this rule. All withdrawals to prevent a policy from failing this test must occur prior to the policy anniversary.

RECOMMENDED COURSE OF ACTION IN YEARS 1-9

Unless you intend to operate your policy as a pure or near pure T100 plan you should not wait until the 7th year to begin significant deposits. In order to maximize the effectiveness of Universal Life, deposits up to the maximum should be considered each and every year
Not only will you escape from the 250% rule you will enable your policy's TAX SHELTERING OF GROWTH to enhance your policy CSV and Death Benefit.

Section 146 of the Income Tax Act provides for significant accumulations of non-taxed interest, inside of a UL Policy and at death upwards of 100% of the Death Benefit may be paid out with out attracting taxation. In addition while living, significant income levels can be achieved by assigning the policy as collateral for TAX FREE loans from your favourite Bank.