The to-do list associated with moving from Canada to the U.S. (or vice versa) is longer than Highway 401, which means any issues or considerations associated with life insurance policies are usually forgotten until it’s too late.

Yet it is important to analyze your life insurance products prior to making a cross-border move, particularly if you own a universal life insurance policy.

Universal Life Insurance Policies: Cross-Border Issues

On the surface, a universal life insurance policy appears to be the same product on both sides of the border – a flexible permanent life insurance product that combines the low cost of a term insurance product with a savings element. When you purchase a universal life insurance policy, you are taking advantage of an investment component that generates tax-exempt income.
However, each insurance company tailors its specific plans to stay within these tax-exempt guidelines; unfortunately, Canada and the U.S. each have different formulas to determine the tax-exempt status of their respective policies.

Such discrepancies can create issues.

Taxation Issues

For example, a Canadian who moves to the U.S. and retains his Canadian universal life insurance policy could be subject to U.S. taxes on the income generated within that policy – income that would be considered tax-exempt in Canada.

Certain investments within a Canadian policy, such as Canadian mutual funds and Canadian exchange-traded funds (ETFs), can create other issues for U.S. residents. U.S. regulatory laws are very strict about non-U.S. investments like Canadian mutual funds and ETFs, which the IRS considers to be passive foreign investment companies (PFICs). Since PFICs are taxed harshly by the IRS, a U.S. resident holding PFICs in his Canadian universal life insurance policy could be harshly taxed on the income generated in that policy, and he could also be subject to additional, burdensome tax filings.

U.S. Estate Tax Issues

In addition to taxation issues, a universal life insurance policy can create estate planning issues if the policy is not structured properly. Without proper planning, the proceeds of a life Insurance policy could be included in one’s overall net worth, triggering an estate tax liability should the individual’s net worth exceed the U.S. estate tax exemption upon death. (For a good primer on the difference between Canada’s “death tax” and U.S. estate tax, read my colleague Jonah Ravel’s blog).


A possible solution to prevent life insurance proceeds from being included in your net worth calculation as a U.S. resident is to establish an Irrevocable Life Insurance Trust (ILIT) and for the ILIT to own your life insurance policies. This technique is a great way to avoid taking up U.S. estate tax exemption room while retaining the freedom to transfer the proceeds of your life insurance policies to your heirs tax-free.

To ascertain whether there is a hurdle to overcome regarding the investments in your policy, it is recommended that you speak with a cross-border insurance tax consultant or an actuary with experience in cross-border insurance before you move.

These experts will be able to tell you whether your Insurance policy will maintain its tax-exempt status on the other side of the border. Do not terminate your policy prior to speaking with an expert. Liquidating your policy could leave you with an unwanted and potentially unnecessary tax liability before you depart.

For more information about cross-border life insurance policy issues and ILITs, please do not hesitate to contact us.

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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.