Maximum Premium (Universal Life Insurance)

Maximum Premium refers to the highest amount of money you are allowed to contribute to a Universal Life Insurance policy each year without causing the policy to lose its tax-advantaged status. This limit is designed to comply with Canadian tax rules that define how much can grow inside a life insurance policy on a tax-deferred basis.

Unlike the minimum premium, which is the least you must pay to keep the policy active, the maximum premium represents the upper funding limit set by the policy to preserve its classification as exempt under the Income Tax Act.

Why the Maximum Premium Exists
Universal life insurance policies are popular not only for their permanent coverage but also for their cash value growth potential. However, to prevent these policies from being used purely as tax shelters, Canadian tax law sets exempt test limits. These rules cap how much can be contributed to the policy relative to the amount of insurance coverage.

If contributions exceed this threshold:

• The excess amount may be diverted into a side account, which is taxable
• Or refunded to the policyowner
• The policy could become a non-exempt policy, resulting in taxation on future gains

How Maximum Premium is Calculated
Each year, the insurer estimates your policy’s maximum allowable premium based on several factors, including:

• Insurance coverage amount
• Type and cost of additional benefits or riders
• Age and risk classification of the insured
• Value of the investment accounts
• Assumed interest rate for future investment growth
• Frequency and amount of premium payments

The estimated maximum can change annually and may go up or down depending on policy performance and changes to your coverage.

What Happens if You Pay More Than the Maximum?
If you pay more than the allowable maximum premium:

• The excess funds are placed into a side account, if allowed
• The side account grows taxable each year
• The death benefit from the side account is usually paid to the policyowner or their estate, not the named beneficiary
• Excess funding could trigger unintended tax consequences

Minimum vs. Maximum Premium – Summary Table

Key Takeaways‍

• The maximum premium is the most you can pay annually into a universal life insurance policy while maintaining its tax-exempt status
• It is recalculated every policy year
• Paying more than the maximum may move funds into a taxable side account
• Overfunding within the allowed maximum can help build tax-deferred wealth for retirement or estate planning

Bottom Line:
The maximum premium is a powerful planning tool for individuals looking to grow tax-efficient savings inside a life insurance policy. It allows you to fund your policy above the required minimum but within limits that preserve tax advantages. Working with a knowledgeable insurance advisor can help ensure your contributions are optimized for your financial goals and tax strategy.