Investigating the tax changes for G2 and G3 insurance policies

This article was generously provided by Paulo Fonseca, Business Development Consultant, Financial Horizons Group, Quebec Region.


New tax changes for life insurance products came into effect in 2017 and their introduction was followed by a number of questions from advisors. And for good reason!


The characteristics and possibilities of conversion without affecting taxes vary depending on the insurance and the issuing insurance company. The right choice can be nuanced.


Let’s take a closer look...


G1, G2 and G3: definitions and brief background

Before going any further, let’s focus on what G1, G2 and G3 mean.


In industry terminology, the “G” designation refers to the word “generation” and is a reference to each of the tax systems for life insurance products that have been identified by specific changes. Policies are identified as G1, G2 or G3 to indicate the insurance policy era during which they were issued. G1 is assigned to policies issued before 1982 and G2 to those issued after 1982 but before 2017; the latest generation, G3, refers to policies issued since January of 2017.


The most recent tax system changes that led to G3 are the result of government consultations with the financial services industry dating back to 2012. These changes didn’t have any real results until the first half of 2016. Then from the autumn of 2016, certain products were subject to modifications and others were withdrawn completely. There were signs of a “perfect storm”, with new rules and the surrounding uncertainty being leveraged by our industry and our peers. The storm led to a flurry of sales during that same period of uncertainty.


And although we’ve been living in the G3 era since January of 2017, questions persist. Advising on this subject is still complicated as many factors must be taken into account and, what’s more, they’re different depending on the insurer.


Tax implications to consider when changing status from G2 to G3

For some clients, the impact of these G3 tax changes is very real (for example, the loss of vested rights under a G2 policy). From an administrative point of view, each insurer does things differently so as to restrict certain operations and thus prevent changing or losing G2 status, even going as far as to make it officially recognized by contract holders. What’s more, any new operation can have tax implications. In many cases, the issue that allows a line to be drawn is the need for new underwriting and the perception of when exactly this need arises.


Here is a list of factors that can lead to the loss of vested rights and G2 status due to the requirement for new medical underwriting:

  • Addition of new coverage, benefits or riders (where possible) to an existing G2 contract.
  • Any increase to existing coverage after 2016.
  • Term insurance converted into a permanent product after 2016.
  • Substitution of an insured person subject to medical underwriting after 2016.
  • Any possible change modifying the contract structure or insured persons and requiring medical underwriting after 2016.


Here are the exclusions that do not affect the G2 status of policies, as long as none of the operations mentioned above are involved and are not ultimately considered as new medical underwriting:

  • Change from a smoker’s to non-smoker’s rate.
  • Rate reduction or revision of additional premiums.
  • Change of insurance cost when this is permitted and provided for in the contract (for example: changing from an annually renewable cost to a uniform cost).
  • Increase in face amount when future insurability coverage is included in the contract (individual or business). As this is considered a contractual right, it does not constitute a conversion.
  • Any additional deposit or premium does not imply any change in the face amount already at risk.
  • Change of ownership.
  • Contract yielded as collateral for a loan.


Remember, any operation can change the vested rights of a contract. Keep in mind that all term or permanent G2 products can remain worthwhile for holders. It is therefore preferable, where possible and as the need arises, to keep the G2 status and simply draw up a new separate contract.


If you are unsure about what to do, we strongly advise you to check with a member of the team from your local branch office. We’d be happy to help.