What to Consider When Purchasing Corporate Insurance
December 9, 2019
In previous articles, we’ve discussed corporate-owned insurance and how it can benefit your business. As a whole, life insurance, especially in the corporate sense, is a valuable asset and in the right circumstances, there are many benefits to owning it. However, like anything else in life, there are a few caveats to consider.
Make sure to select the right beneficiary! Remember that you're using corporate dollars to fund this corporate "asset" so if the corporation owns the policy (asset), pays for the policy (again, asset) but you designate you or your spouse as the beneficiary, then the Canada Revenue Agency (CRA) would assess a taxable shareholder benefit, which is not a good thing! So, what is a taxable shareholder benefit? Essentially, it is a fair market value benefit assessed from using a corporate owned asset for personal use without paying for the benefit.
Corporate-owned insurance can achieve many objectives but can leave your policy vulnerable to the company’s creditors. To minimize this risk, additional planning is required and includes having another company own the policy and the operating company designated as the beneficiary. However, this more complicated structure might not be suitable for your circumstances. In this case, personally owned life insurance inherently provides the creditor protection that you may require.
Purchasing corporate-owned life insurance can sometimes get complicated. Working with an experienced Advisor will provide you with the knowledge and expertise required to properly structure your plan. Your Advisor will be able to help you make informed decisions on questions such as: Does my shareholder agreement accurately reflect the insurance strategy implemented? How can I leverage the policy to create tax-free income in retirement? Will corporate owned insurance affect my ability to claim the qualified small business corporation exemption? Upon death, will the funds flow appropriately to achieve my estate planning objectives?
The Big Picture
It’s always good to know the big picture and when it comes to corporate life insurance, it’s important to know if there are plans to sell the corporation in the future. If so, keep in mind that when the policy is transferred to a shareholder from the corporation, a disposition will occur which can result in a tax liability to the corporation.
For more about this topic, please refer to this article: How Corporate Insurance Can Benefit your Business