Ben Nguyen 
Participating life insurance is a versatile permanent policy option for Canadian businesses to consider. It provides lifetime protection along with long-term cash value growth and dividend upside based on the insurer’s performance. Read this in-depth guide to fully understand how business-owned participating life insurance policies work and if they suit your business needs.
What is Business-Owned Participating Life Insurance in Canada?
Business-owned participating life insurance in Canada refers to participating whole life insurance policies owned by the company on the lives of key individuals like owners or executives.
Participating whole life insurance combines permanent death benefit coverage with professional cash value management by the insurer. It is a pool of policies conservatively invested by the insurance company. Returns above the amount needed to pay claims and expenses are paid back to policyholders in the form of dividends.
The main benefits to businesses include:
- Lifelong guaranteed insurance protection
- Steady cash value growth
- Potential dividends from surplus investment earnings
- Tax-advantaged growth and distribution
Business owners utilize participating whole life policies to fund buy-sell agreements, repay debts, replace lost revenues, and supplement retirement income.
How Does Business-Owned Participating Life Insurance Work?
Here is an overview of how business-owned participating life insurance operates:
Premiums
- The policyholder pays premiums, which are pooled into the participating account managed by the insurer.
Professional Management
- The funds in the account are conservatively invested by professionals at the insurance company.
Surplus Earnings
- After paying claims, expenses, and taxes, any remaining investment income represents surplus earnings.
Dividend Distribution
- The insurer pays back a portion of the surplus to eligible policyholders in dividends.
Policyholder Options
- Dividends can be taken as cash, used to pay premiums or buy more insurance.
Death Benefit
- Upon the insured’s death, the business receives the guaranteed tax-free death benefit.
The cash value also accumulates on a tax-deferred basis. It can be accessed through surrenders, loans, or collateral assignments to supplement funds as needed.
When Does a Business Need Participating Life Insurance?
Common business uses for participating life insurance include:
Buy-Sell Agreements
The death benefit can provide liquidity for surviving partners to purchase a departing partner’s shared interest in the business upon their death.
Key Person Coverage
If a key employee or owner dies, the payout helps repay debts, cover revenue losses, and retain stability until a replacement is found and trained.
Read more: Key Person Insurance in Canada
Supplemental Retirement Income
The tax-deferred cash value growth over time supplements retirement income for business owners. Policy loans and withdrawals provide tax-efficient income.
Emergency Funds
The cash surrender and loan values give businesses quick access to funds in the event of unforeseen expenses or income disruptions.
Executive Benefit Plans
The tax-advantaged growth and tax-free death proceeds create rewarding bonuses or retention incentives for valued executives and employees.
Read more: Executive Bonus Plan in Canada
Evaluating the Pros and Cons of Business-Owned Participating Life Insurance
Participating life insurance offers several advantages along with some potential drawbacks for business owners to weigh:
Key Advantages
- Lifelong guaranteed death benefit coverage
- Cash value growth with guaranteed minimum rates
- Dividend upside based on the insurer’s performance
- Stable premium costs
- Tax-deferred cash value accumulation
- Liquidity through loans and withdrawals
- Reputable insurer financial backing
Potential Disadvantages
- Higher premium costs than term insurance
- Less investment customization than non-participating permanent policies
- Dividends are not guaranteed
- Reduced death benefit when cash value accessed
- Surrender charges may apply if lapsed or cashed in
A major benefit of participating policies is they provide permanent coverage paired with the flexibility of adjustable premiums and accessible living benefits. This comes at the cost of higher premiums than term insurance. Overall, participating life insurance is a robust option for businesses seeking lifetime protection and cash value advantages.
Cost of Business-Owned Participating Life Insurance in Canada
Premium costs for business-owned participating life insurance depend on several factors:
Key Factors Affecting Premiums
| Factor | Impact on Cost |
|---|---|
| Age | Increases with age |
| Gender | Lower for women |
| Health | Poor health increases premiums |
| Occupation | Hazardous occupations cost more |
| Face amount | Higher death benefits cost more |
| Premium duration | Shorter premium duration leads to higher cost |
A business should expect to pay more for participating policies compared to term insurance due to the cash value component. However, dividends from the insurer’s surplus can help offset premium costs over time.
Exact premiums vary widely based on the insurer, covered individuals, and policy parameters. It is best to request quotes from multiple providers before deciding on coverage.
Who Needs Business-Owned Participating Life Insurance?
Common business structures that can benefit from business-owned participating life insurance include:
- Sole proprietors – To pay debts and facilitate continuity if the owner dies
- Partnerships – For buy-sell agreements to transfer the deceased partner’s interest
- Key person policies – To compensate for the loss of vital talent
- Closely-held corporations – For liquidity and stability, if majority shareholders pass away
- Family businesses – To retain control and avoid disputes over succession
In general, privately-owned companies with reliance on key figures are ideal candidates for the benefits participating insurance can provide. The death proceeds and living benefits ensure continuity and stability.
Read more: Shareholder/Partner Insurance in Canada
Maximizing Business-Owned Participating Life Insurance
Purchasing participating life insurance can provide significant benefits tailored to business needs. Follow these tips when considering participating policies to protect your company’s future:
Cover Key People– Insure owners, partners, executives, or sales stars whose loss could jeopardize operations. The payout can fund transitions.
Fund Buy-Sell Agreements– The death benefit can facilitate the transfer of a deceased partner’s shares to surviving partners, ensuring continuity.
Repay Debts– Participating policies provide liquidity to repay business debts and prevent disruptive restructuring if an owner or guarantor dies.
Replace Lost Revenues– The tax-free payout can maintain working capital while replacing sales or production lost when a top revenue generator dies.
Supplement Retirement– Cash value accumulations over time can supplement future retirement income for owners. Policy loans provide tax-friendly income.
Attract and Retain Talent– Businesses can use participating life insurance as an appealing benefit for recruitment and retention of key employees.
Provide Loan Collateral– Borrowing against the policy’s cash value can secure financing for growth opportunities without diluting ownership.
Support Succession Plans– Proceeds enable businesses to smoothly transition ownership according to established succession plans.
Compare Insurers Thoroughly– Get premium quotes from multiple providers to find the best rates for your needs and budget.
Review Coverages Regularly– Reevaluate policies as business conditions change to keep insured amounts, terms, and beneficiaries optimal.
Mind Premium Payment Dates– Set calendar reminders for payments to prevent accidental lapse. Consider auto-debit for convenience.
Leverage Expert Guidance– Consult experienced insurance advisors and brokers who can explain options and recommend ideal solutions.
With proper planning, participating life insurance can become an integral asset in managing risk and maximizing continuity for privately held businesses.
Purchasing Business-Owned Participating Life Insurance
Follow these key steps when buying participating life insurance to protect your business:
Calculate Coverage Needs – Factor in costs of replacing lost revenue, repaying debts, funding buy-sell agreements, and other impacts of losing a key person. This determines the optimal death benefit.
Compare Quotes from Insurers – Reach out to various insurance providers, brokers, and agents to get premium quotes for the coverage amount you need. Compare costs.
Fill Out Applications – Provide detailed personal and health data on the person(s) to be insured so the insurer can assess eligibility. Authorize access to medical records.
Undergo Underwriting – The insurer will evaluate the applicant’s qualifications, medical history, and risk factors to decide on issuing a policy. This also sets pricing.
Review Issued Policy – Carefully verify the terms of the final issued policy, including the amount of coverage, premiums, cash value scale, and dividend eligibility.
Make Payments On Time – Participating in life insurance requires lifelong premium payments. Set reminders and use auto-pay to prevent accidental lapses.
Adjust As Needed – Revisit coverage amounts and policy terms as your business evolves to ensure optimal protection and value.
Consulting an advisor can provide guidance on successfully navigating the paperwork and process. Follow these steps to put in place business-owned participating life insurance tailored to your long-term needs and budget.
Sourcing Business-Owned Participating Life Insurance
Businesses have several options when buying participating life insurance:
Insurance Brokers – Brokers can shop policies from a variety of insurers to find the right fit for your needs and budget. Their market access brings pricing leverage.
Insurance Agents – Agents sell policies for one carrier but have specialized knowledge to explain available products.
Financial Advisors – Accountants, planners, and other advisors can help obtain quotes and purchase suitable coverage.
Direct from Insurers – Large insurance companies sell policies directly through websites, call centers and local office representatives.
Group Plan Administrators – Employee benefits firms can source competitive participating life group plans.
When selecting sources, prioritize experience with business insurance needs. Look for consultative guidance on product details, pricing optimization and objective recommendations. This expertise ensures your business buys adequate, affordable coverage that aligns with long-term objectives. An independent broker often provides the best support for navigating the process.
Making a Claim on a Business-Owned Participating Life Insurance Policy
When an insured person passes away, here are the steps for the business to make a claim:
Promptly Notify the Insurer – Contact the insurance provider as soon as possible to begin the process. Many have dedicated claims departments.
Complete Required Paperwork – The insurer will provide claim forms for the business to complete. Have beneficiary information ready.
Submit a Death Certificate – Supply a certified copy of the death certificate as evidence the insured has passed away.
Provide Additional Documents – The insurer may request medical history authorization, financial statements, or other records to verify claim validity.
Deduct Outstanding Loans – If the policy has any outstanding loans or interest due, those balances will be subtracted from the payout.
Receive the Tax-Free Payment – Finally, the insurer will issue the income-tax-free death benefit to the named business beneficiary.
Consulting the agent or broker who sold the policy can provide guidance on smoothly navigating the claims process. Their expertise helps secure the full tax-advantaged payout the business is entitled to. handling the claims process efficiently. This helps secure the full death benefit you are owed.
Alternatives To Business-Owned Participating Life Insurance
The main alternatives to business-owned participating life insurance are :
- Business-owned Term life insurance
- Business-owned Permanent life insurance
- Business-owned Universal Life Insurance
Business-owned Term Life Insurance
Business-owned Term life provides temporary death benefit coverage from 1 to 30 years. It does not build cash value or pay dividends.
Key features:
- Pure protection
- Lower cost than permanent insurance
- The coverage amount remains constant
- Renewable at the end of term policy without proof of insurability
- No cash value, dividends, or investment component
Term life meets short-term needs like covering a business loan. It offers affordability in exchange for lack of lasting value.
Business-owned Permanent Non-Participating Life Insurance
Non-participating permanent life insurance provides guaranteed lifetime protection and cash value like participating policies. However, non-participating policies do not pay dividends.
Key features:
- Lifetime guaranteed coverage
- Cash value with guaranteed growth
- No dividends
- Lower premiums than participating life
- Policy management fees deducted from cash value
Non-participating permanent policies can provide accessibility to cash value, such as participating in insurance without the higher costs. However, they lack the dividend upside potential.
Business-owned Universal Life Insurance
Participating and Universal life policies have some key differences businesses should understand:
Premium Flexibility: Participating policies have guaranteed level premiums. Universal life premiums are adjustable.
Cash Value Growth: Universal policies offer higher but variable cash value growth compared to participating policies’ guaranteed minimum rates.
Investment Control: Universal life allows selecting investment options. Participating policies follow the insurer’s conservative strategy.
Dividends: Only participating life policies can provide dividends from excess reserves.
Costs: Universal life typically has lower premium costs, especially at younger ages.
Guarantees: Participating policies guarantee premiums, cash values, and death benefits. Universals have fewer guarantees.
In general, universal life provides more flexibility and control, while participating life offers stronger guarantees. The optimal choice depends on each business’ circumstances.
Comparison of Participating and Universal Life Insurance:
| Feature | Participating Life | Universal Life |
|---|---|---|
| Premiums | Guaranteed level | Flexible adjustable |
| Cash value growth | Guaranteed minimum rates | Variable investment returns |
| Investment control | Insurer manages | Policyholder selections |
| Dividends | Yes | No |
| Guarantees | Stronger | Weaker |
| Costs | Higher | Lower |
Conclusion
Business-Owned Participating Life Insurance is one form of Corporate-owned Life Insurance available to companies. For many Canadian businesses, participating life insurance can provide advantages beyond just death benefit protection. The lifelong coverage guarantees continuity after losing valued employees and owners.
The cash value accumulation and dividends offer additional benefits during their lifetimes as well. Though premiums exceed term insurance, the guarantees and upside potential make business-owned participating life insurance policies a strategic investment in the company’s future. When structured appropriately, this versatile insurance solution can become an integral part of business planning.
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To help identify if business-owned participating life insurance fits your needs, contact the advisors at lifebuzz.ca. Our team provides complimentary consultations, personalized quotes, and expert support so you can make informed decisions. Partner with us to protect what matters most – your business, assets, and legacy.
Frequently Asked Questions (FAQs) About Business-Owned Participating Life Insurance
How is business-owned participating life insurance taxed in Canada?
A: The policy's tax-deferred growth and tax-free death benefit payout provide tax advantages for businesses. Dividends are received tax-free as well.
What are the main features and benefits of business-owned participating life insurance?
A: Guaranteed lifetime coverage, cash value growth, dividend potential, tax benefits, and liquidity through cash access options.
What is the difference between participating and non-participating permanent life insurance for businesses?
A: Participating policies can pay dividends, while non-participating do not. However, participating policies also tend to have higher premium costs.
Is the interest rate earned on the cash value of business-owned participating life insurance policies guaranteed?
A: Whole life participating policies guarantee a minimum interest rate on cash value. Universal life rates fluctuate with market performance.
Can a business use the cash value of a participating life insurance policy for any purpose?
A: Yes, the business owner can take loans or withdrawals, pledge the policy as collateral, or surrender it entirely for the cash value.
Does borrowing against the cash value of business-owned participating life insurance reduce the death benefit?
A: Yes, any outstanding loans and interest reduce the net amount beneficiaries receive upon death.
Can a business deduct the premiums paid for participating life insurance on employees?
A: Premiums are generally not tax deductible for the business if it directly owns the policy. Exceptions apply to group policies.
Is the death benefit of business-owned participating life insurance subject to income tax for beneficiaries?
A: No, beneficiaries, whether individuals or the business itself, receive payouts tax-free.
Can a charitable organization be named as a beneficiary of business-owned participating life insurance?
A: Yes, charities and non-profits can be full or partial beneficiaries, just like individuals.
What types of riders or additional benefits can be added to business-owned participating life insurance?
A: Common options include chronic illness, disability, and long-term care riders to expand protections.
How does converting term life insurance to permanent business-owned participating insurance work?
A: The business must apply and qualify again with new underwriting. So, conditions and rates will likely differ from the term policy.
What are the most common uses of business-owned participating life insurance?
A: Funding buy-sell agreements, covering loss of a key person, supplementing retirement income, loan protection.
What happens if a business stops paying premiums on a participating life insurance policy?
A: The policy can lapse if premiums are not paid. The business may be able to reinstate with underwriting.
Can a business insure multiple partners or key employees under one participating life policy?
A: Yes, joint or multi-life policies are available to cover two or more people under a single contract.
Is it better for a business to own participating policies directly or for owners to own policies?
A: Direct business ownership provides more control. However, personal ownership can offer estate planning benefits.
Can an existing business buy participating life insurance policies insuring prior owners or retirees?
A: Yes, as long as the business retains an insurable interest, it can purchase policies on prior owners.
What is the process for a business to make a claim on a participating life insurance policy?
A: Notify the insurer, complete claim forms, and provide a death certificate and any other documentation requested.
How long does it usually take for a business to receive the payout on a participating life insurance claim?
A: After submitting complete documentation, proceeds are typically paid out in 2-4 weeks.
Do insurance companies limit the total amount of participating life insurance a business can purchase?
A: Insurers may cap the total coverage amount they will issue based on business revenue and assets.
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