Jamie, a 42-year-old successful consultant in Alberta, has a substantial Universal Life policy. His advisor warns him about the implications if his policy fails the 'tax-exempt' test. What is the most significant consequence for Jamie if his UL policy loses its tax-exempt status under Canadian tax law?

Question: Jamie, a 42-year-old successful consultant in Alberta, has a substantial Universal Life policy. His advisor warns him about the implications if his policy fails the 'tax-exempt' test. What is the most significant consequence for Jamie if his UL policy loses its tax-exempt status under Canadian tax law?

Answer options:

• The insurer will automatically convert the UL policy into a term insurance policy. ✅ The accumulated investment income within the policy will become immediately taxable to Jamie annually.
• Jamie will lose the death benefit guarantee of the policy.
• The policy will cease to have any cash value accumulation.

Correct answer: The accumulated investment income within the policy will become immediately taxable to Jamie annually.

Explanation: If a policy fails the tax-exempt test, the annual investment income earned within the policy becomes taxable to the policyholder, rather than accumulating on a tax-deferred basis, significantly eroding the policy's tax advantages.