Business-Owned Permanent Life Insurance in Canada: A Powerful Planning Tool

Permanent life insurance can be an extremely effective planning tool for business owners in Canada looking to protect their company and achieve tax-advantaged growth. When structured properly and aligned with the right goals, permanent life insurance policies owned by a business can provide a multitude of benefits both during the lifetime of the owners and after their death.

What is Business-Owned Permanent Life Insurance?

Business-owned permanent life insurance refers to a permanent life insurance policy that is owned by a corporation or other business entity, rather than owned personally by an individual.

Permanent life insurance provides lifetime protection, unlike term life insurance, which covers a policyholder for a specific period of time. The two main types of permanent life insurance available to businesses in Canada are participating (par) life insurance and universal life insurance.

With permanent life insurance, the premiums paid enable growth of cash value within the policy, in addition to paying for the cost of insurance coverage. This cash value can be accessed by the business owners while they are still living if needed.

A key benefit of business-owned permanent life insurance is that the growth of the cash value within the policy is tax-advantaged. When held properly inside a corporation, the investment gains accrue on a tax-deferred basis.

What are the Benefits of Business-Owned Permanent Life Insurance?

There are numerous advantages for Canadian corporations that utilize business-owned permanent life insurance as part of their financial planning:

• Tax-Advantaged Growth Inside the Policy: The cash value built up within a permanent life insurance policy grows on a tax-advantaged basis. Earnings are tax-deferred as long as they remain inside the policy. This enables faster growth compared to fully taxable investments.
• No Impact on Small Business Deduction: The growth within the policy is not considered passive investment income, so it does not reduce access to the small business deduction like other corporate investments might.
• Tax Savings from Using After-Tax Corporate Dollars: Premiums can be paid using lower-taxed corporate retained earnings rather than after-tax personal funds. The small business corporate tax rate is often below 15%, whereas top personal marginal rates can exceed 50% in some provinces.
• Flexibility in When to Make Contributions: Unlike RRSPs which have annual limits, there is flexibility with a permanent life insurance policy to decide when and how much to contribute above the cost of insurance.
• Access to Cash Value During Lifetime: Policyowners can access the cash value that accumulates through tax-efficient policy loans or withdrawals if needed during their lifetime.
• Heirs Receive Death Benefit Tax-Free: When the last insured person dies, the death benefit received by the corporation is non-taxable. This can be efficiently passed on to the deceased’s heirs.

What Types of Permanent Life Insurance are Available for Businesses?

The two main options for permanent life insurance policies owned by a corporation are participating life insurance and universal life insurance. Here is an overview of the key features and differences between these two types of policies:

Business-Owned Participating (Par) Life Insurance

Participating life insurance for business owners, also known as whole life or “par” insurance, has guaranteed premiums, cash values, and death benefits specified in the policy contract. It also qualifies for dividends, which are payments made to policyholders when the insurance company’s investments perform well.

• Provides guaranteed cash values and a guaranteed death benefit.
• Premiums are fixed and do not change.
• May pay dividends that can be taken in cash or used to increase coverage.
• More conservative investments backing the policy cash values.
• Better options for succession planning and buy-sell funding.

Participating policies provide stable, predictable coverage and cash value growth. They are best for business owners who want lifetime guarantees for protection and risk avoidance with their policies.

Full review: Business-Owned Participating Life Insurance

Business-Owned Universal Life Insurance

Universal life insurance for business owners offers flexible premium payments and the ability to choose separate investment accounts for the cash value portion of the policy. It provides options to adjust coverage and payments.

• Flexibility in the amount and timing of premium payments above a minimum.
• Policyowner directs funds into investment accounts they select.
• Typically more cost effective than participating life insurance.
• Investment accounts backing policy are exposed to market fluctuations.
• Must monitor and manage investments backing the policy.

Universal life insurance lets businesses align the policy with their changing budgets and financial priorities. Business owners who want to actively manage their coverage to meet evolving needs would benefit most from universal life.

Full review: Business-Owned Universal Life Insurance

Who Can You Protect with Business-Owned Permanent Life Insurance?

There are several key people that business owners can protect through a permanent life insurance policy owned by their corporation:

• The Business Itself: Covering the death of an owner or key employee can ensure sufficient liquidity to maintain operations, pay off debts, and fund the search for a replacement.
• Business Partners: Funds to purchase a deceased partner’s ownership share and facilitate succession. (check out full review: Shareholder/Partner Insurance)
• Key Employees: Protects against the loss of talent and expertise when valued team members pass away unexpectedly.

Permanent insurance also provides living benefits that can be useful during an owner’s lifetime, including supplementing retirement income and providing access to funds if disability strikes.

How Can Business Owners Use Permanent Life Insurance?

In addition to the death benefit protection, there are several strategic applications for a permanent life insurance policy owned by a Canadian corporation:

• Source of Additional Cash Flow: The tax-advantaged cash value growth can be accessed through withdrawals or policy loans to support liquidity needs.
• Fund a Buy-Sell Agreement: The death benefit can redeem a deceased owner’s shares when structuring a buy-sell arrangement funded by life insurance.
• Protect Key Employees: Replace lost expertise by using the death benefit proceeds to hire and train a new person or to compensate for lost productivity.
• Loan Collateralization: The cash surrender value within the policy can be used as collateral for business loans at competitive rates through a lender like the issuing insurance company.
• Diversify Assets and Reduce Tax: Growth within the insurance policy provides diversity and tax efficiency compared to holding only fixed income investments within a corporation.
• Succession Planning: Permanent insurance can fund the purchase of a business by a family member or key employee when the current owner wants to retire or exit.

What are the Tax Considerations for Business-Owned Life Insurance?

While permanent life insurance policies offer tax-advantaged growth, there are some tax implications to be aware of:

• Tax on Withdrawals: Any withdrawals from the cash value during life will be taxed as capital gains on gains above the adjusted cost basis.
• Transferring Ownership: Transferring a policy with cash value from a corporation to an individual policyholder can trigger taxes.
• Payment of Death Benefit: This is non-taxable to the corporation. The death benefit minus adjusted cost basis flows into the Capital Dividend Account from which tax-free capital dividends can be paid to heirs.

Careful set up and management of a permanent insurance policy owned by a corporation can help mitigate tax issues. Thoroughly planning the intended uses and analyzing the tax implications is key.

Full review: Corporate-Owned Life Insurance In Canada

Alternatives for Business Protection

While business-owned permanent life insurance is a key coverage for many companies, there are additional types of insurance and planning that can further protect a business from unexpected losses. Expanding protection beyond just life insurance allows companies to insure against a wider range of risks like property damage, lawsuits, or disruption of operations. A diverse insurance portfolio along with business succession planning provides a more comprehensive financial safety net.

Business-owned Term Life Insurance

Besides business-owned permanent life insurance, business owners can also look at term life insurance for temporary protection. Business-owned term life insurance provides temporary coverage and pays out a tax-free lump sum to the named beneficiaries if the insured person passes away during the term. It can help a business continue operating by providing funds to cover expenses, debts, or a buyout if an owner or key employee dies.

Business-owned term life insurance works similarly to personal term life policies, with set premiums over a defined coverage period, but it meets different business needs like loan repayment or key person protection. The affordable premiums and ability to convert to permanent insurance make it an attractive option for small companies to get basic life insurance. Factors like age, health, coverage amount, and term length impact premium costs. While not a permanent asset, term life gives business owners peace of mind knowing their company and families have some financial protection.

The table below compares between business-owned permanent life insurance and business-owned term life insurance:

The key differences come down to permanent vs temporary coverage, the ability to build cash value, and the level of flexibility and control over the policy. While more complex, permanent insurance can offer more potential benefits.

Property Insurance

• Covers damage to physical business assets like buildings, inventory, equipment due to events like fire, theft, or natural disasters.
• Required by lenders when getting a business loan to protect their investment.
• Helps pay for repairs or replacements if assets are damaged.

Liability Insurance

• Protects against lawsuits from 3rd parties for injuries or property damage caused by the business.
• Types include general liability, professional liability, product liability.
• Covers legal costs and damages awarded in a lawsuit.

Business Interruption Insurance

• Replaces income lost if business operations are disrupted by a covered event.
• Can cover operating expenses, profits, rents, loan payments while closed.
• Allows business to recover lost income such as if there is fire damage.

Business Succession Planning

• Outlines how a business will transition to new ownership in the future.
• Addresses issues like retirement, death, disability, or selling the company.
• Can involve life, disability, and critical illness insurance to fund transitions.
• Ensures smooth transfer to new owners according to your wishes.

Having the right insurance helps reduce risks and continue business success. Consulting with advisors at Lifebuzz to help create a customized plan.

Pros and Cons of Business-Owned Permanent Life Insurance

There are several advantages permanent life insurance can provide businesses and some potential drawbacks to consider.

Pros of Business-Owned Permanent Life Insurance

Lifetime Protection

Business-owned Permanent life insurance delivers guaranteed coverage spanning the insured’s entire lifetime. This ensures the policy benefits will be there when the business needs them, no matter how long in the future that may be. Term policies expire after a set period without lifelong guarantees, leaving the business unprotected.

Tax-Advantaged Growth Potential

The cash value within business-owned permanent life insurance grows on a tax-deferred basis and can be accessed tax-free by the business if structured properly through policy loans and withdrawals. This results in significantly higher growth compared to taxable investments the business might otherwise use for that capital.

Financial Flexibility

Policy options like loans, withdrawals, and adjustable death benefits allow businesses to leverage the cash value for strategic needs. Funds can be accessed to cover unforeseen costs, finance growth opportunities, or manage fluctuating income streams. This supplemental source of liquidity provides financial flexibility.

Asset Protection

Properly structured business-owned permanent life insurance’s cash value and death benefit receive favorable treatment from creditors. This can help protect business assets as part of the overall financial strategy.

Cons of Business-Owned Permanent Life Insurance

Higher Cost Than Term Insurance

Business-owned Permanent insurance premiums are substantially higher than pure-term insurance since permanent policies fund both the death benefits pool and cash value reserves. The term policy only covers the former. Businesses must budget higher long-term costs for the permanent benefits.

Less Liquidity Than Some Investments

The cash value within business-owned permanent policies offers good liquidity relative to other insurance solutions. However, readily liquid assets like stocks, bonds, and bank accounts may offer quicker access to funds if they are suddenly needed. This lower liquidity makes it important to only allocate capital to permanent insurance that can be maintained long-term.

Ongoing Premium Commitment

Business-owned Permanent life insurance requires lifelong premium payments, although frequencies and amounts may be adjustable. Some businesses struggle with consistently funding these necessary payments year after year. Disciplined budgeting is required.

The pros and cons highlight the trade-offs business owners make to gain permanent life insurance’s unique protections and tax advantages. An insurance advisor can explain these considerations for each business situation.

Tips for Purchasing Business-Owned Permanent Life Insurance

These tips can help business owners make informed permanent life insurance purchasing decisions:

• Involve a qualified advisor – Work with an experienced broker or agent to understand your options and strategically structure the policy.
• Analyze business goals first – Consider how insurance can support objectives like business continuity, buy-sells, succession planning and more.
• Review both permanent policy types – Look at participating and universal options to see which better fits your priorities and budget.
• Model different premiums and death benefit levels – Work through scenarios to optimize cash flow and coverage.
• Check insurer financial strength ratings – Choose a carrier with high independent ratings for the ability to pay claims.
• Read the policy illustrations closely – Understand all the guarantees, projected dividends, fees, and charges.
• Consider any health issues early – Applying earlier in life helps get better rates.
• Coordinate personal and business coverage – Look at both individual and business-owned policies for comprehensive protection.

Key Takeaways

Permanent life insurance, such as participating and universal life policies, can be extremely useful tools for business owners in Canada looking to protect their company and achieve tax-efficient growth.

The death benefits can provide liquidity to maintain business operations when a key person passes away. The living benefits like tax-advantaged policy cash values can supplement retirement income or provide access to funds during disability.

To determine if business-owned permanent life insurance aligns with your goals, have an in-depth discussion with your insurance advisor and tax professionals. With proper structuring and planning, it can provide both protection and optimized growth for corporations. Discuss your specific business situation to develop the right solution.

Frequently Asked Questions (FAQs) About Business-Owned Permanent Life Insurance

Article Sources:

To fully appreciate our rigorous adherence to veracity, transparency, and editorial independence, consider reviewing our Editorial Policy at Lifebuzz.ca. It is this dedication that positions us as the ultimate dependable life insurance news outlet in Canada.

1. Business-owned permanent life insurance – https://www.canadalife.com/
2. What are the different types of business insurance? – canadalife.com
3. Why corporate-owned life insurance is a powerful planning tool – invested.mdm.ca