Business-owned term life insurance provides affordable and temporary coverage to protect a Canadian business when an owner or key employee dies. The tax-free payout can help the company continue operating, pay off debts, fund succession planning, and more. This type of insurance is a smart way for businesses across Canada to protect against the financial impacts of unexpected loss of life.
This article will dive into key details, data, and expert insights on using term life insurance to protect Canadian businesses and organizations.
What is Business-Owned Term Life Insurance?
Business-owned term life insurance is a policy that provides a preset death benefit to a business if the insured person passes away during the term of the policy. The policy only lasts for a specified number of years, such as 10, 20 or 30 years.
The death benefit funds can help the business pay outstanding debts, maintain operations, enact succession plans, and protect against other financial losses that could result from the unexpected loss of an owner or important employee.
Unlike personal life insurance that goes to beneficiaries, business-owned policies pay a tax-free lump sum directly to the business itself. The funds become assets of the company.
Key purposes for term life insurance include:
- Protecting the business if an owner dies
- Funding buy-sell agreements between partners
- Covering the loss of key employees
- Paying off business loans and debts
- Funding succession plans
Premiums are paid annually or monthly by the business and remain level for the entire term length. Rates are based on factors like the insured’s age and health.
Types of Business-Owned Term Life Insurance in Canada
There are two main types of term life insurance policies that Canadian businesses commonly utilize:
Renewable Business-Owned Term Life Insurance
Renewable business-owned term life insurance provides temporary coverage for a set period of time, usually 10-year term, 15-year term, 20-year term or 30-year term. The policy only pays out the death benefit if the insured individual passes away within the initial term.
At the end of the term, there is an option to renew the coverage annually. Premiums increase each year after renewal. This type meets shorter-term needs like:
- Funding a buy-sell agreement between partners
- Paying off debts and loans
- Protecting the business during ownership transition
The renewable term is affordable but does leave gaps in coverage if not renewed.
Convertible Business-Owned Term Life Insurance
With convertible business-owned term life insurance, the policyholder has the option to convert to a permanent life insurance policy when the initial term expires. This provides lifelong protection and cash value accumulation.
Convertible term allows flexibility to get permanent coverage later if business needs change. It can fund needs like:
- Protecting the business forever if an owner dies
- Providing living benefits from cash accumulation
- Funding succession plans beyond retirement
Conversion usually comes with limited time frames and may require new underwriting. Premiums increase at conversion.
Key features to compare:
Feature | Renewable Business-Owned Term | Convertible Business-Owned Term |
---|---|---|
Initial term length | 10-30 years | 10-30 years |
Permanent conversion | No | Yes |
Renewability | Annually after term, with increased premiums | Annually after term, with increased premiums |
Cash value accumulation | No | Yes, if converted to permanent |
Premium costs | Lower | Higher |
In summary, renewable term offers pure protection during the term. Convertible terms allow more flexibility for lifelong coverage later on.
How Does Business-Owned Term Life Insurance Work?
Purchasing Business-Owned Term Life Insurance involves 6 simple steps:
- Choose the coverage amount – Select the death benefit that would adequately protect your business, such as paying off debts or funding operations for a period of time. Common amounts range from $250,000 to $2 million.
- Select the term length – Shorter terms of 10-15 years have lower premiums. Longer terms of 20-25 years provide longer protection. 75% of Canadian buyers opt for 20-year terms.
- Add optional benefits – Riders like waiver of premium for disability or conversion rights can be included for added premium costs.
- Name the business as beneficiary – The tax-free death benefit is paid directly to the business as a lump sum.
- Pay premiums annually or monthly – Rates remain at the same level for the entire term period.
- Renew or convert the policy later – At the end of the term, options include renewing annually, converting to a longer term policy, or switching to permanent life insurance.
The application process involves submitting a proposal with health and other details about the person to be insured. Once approved, coverage starts immediately and remains in effect throughout the term as long as premiums are paid.
If the insured person dies while covered, the business receives a tax-free payout to protect against financial losses.
When Does Your Business Need Term Life Insurance?
There are a few situations when Canadian businesses can benefit from the financial protection of term life insurance:
Insuring Business Owners
If a sole business owner or partner dies, term life insurance provides funds the business can use to settle debts, cover expenses, hire replacements, and continue operations. Partners commonly take out policies on each other to fund buy-sell agreements.
Insuring Key Employees
Businesses should consider policies for vital employees like executives, sales managers, creative directors, technical experts, and others who are essential to operations. The tax-free payout can help attract a replacement and keep things running if the employee unexpectedly passes away.
Further reading: Executive Bonus Plan in Canada
Paying Off Business Loans
Banks often require life insurance when approving small business loans and lines of credit. Term life insurance can cover the outstanding balance to protect lenders if the borrower dies.
Funding Succession Planning
For owners looking to retire or transition the business to heirs, the death benefit can provide funds to family members or key employees to implement succession plans.
Term life insurance can provide affordable coverage for several years while the business transitions. Permanent insurance is another option for lifelong succession planning.
Here is a table summarizing typical term life insurance needs by business type:
Business Type | Typical Needs |
---|---|
Sole proprietorship | $500,000 to $1 million policy to cover business obligations if owner dies |
Partnership | Policies to fund buy-sell agreements and compensate remaining partners |
Small business with loans | Enough coverage to pay off all outstanding loans and debts if owner dies |
Companies with key persons | $250,000 policies for each vital executive or employee |
Businesses planning succession | Term or permanent policies to fund the transition to new owners |
Further reading: Key Person Insurance in Canada
Pros and Cons of Business-Owned Term Life Insurance
There are many advantages of term life insurance policies for Canadian businesses, along with a few limitations to consider:
Pros of Business-Owned Term Life Insurance
- Affordable premiums – Term life is the least expensive form of life insurance. Rates stay level rather than increase annually.
- Customizable terms – Choose a policy length that meets your business’s specific needs, from 10 to 30 years.
- Only pay if death occurs – The policy only pays out if death occurs during the term, which is statistically unlikely for younger insured people.
- Tax-free payout – The lump-sum death benefit is not taxable income for the business.
- Coverage can be converted – Term policies often allow converting to permanent insurance or longer terms later on.
Cons of Business-Owned Term Life Insurance
- No cash value accumulation – Term life insurance does not build equity like permanent policies.
- Not lifelong coverage – The policy expires after the set term period ends, leaving the business unprotected unless renewed.
- Rates increase after renewal – Premium costs go up significantly each year after the initial term expires.
- No living benefits – The death payout only happens if the insured dies and does not provide any funds accessible while living.
Overall, term life insurance offers very valuable financial protection for Canadian businesses at an affordable cost. The limited coverage period and lack of cash value buildup are reasonable tradeoffs for the lower premiums.
What Factors Determine Costs for Business-Owned Term Life Insurance?
Several factors affect pricing for term life insurance policies:
- Age – Costs increase steadily as the insured person gets older due to higher risks. Insurance is most affordable for those under 40.
- Gender – Insurance rates are generally 10-20% lower for women than men.
- Smoking – Policies for smokers cost approximately two times more compared to non-smokers due to health risks.
- Health conditions – Any pre-existing medical conditions like heart disease or cancer can increase premiums by 25-50% on average.
- Family history – Increased costs for individuals with histories of health conditions in their family.
- High-risk jobs – Premiums increase by 10-15% for dangerous occupations like police officers, scuba divers, piloting, law enforcement, etc. , or those with extreme sports hobbies.
- Policy term – Longer terms over 20 or 30 years have higher initial rates than shorter ten or 15-year policies.
The table below shows sample term life insurance costs for a $500,000 20-year term policy based on age and gender:
Age | Male Non-Smoker | Female Non-Smoker |
---|---|---|
30 | $425 | $350 |
40 | $550 | $425 |
50 | $1,100 | $800 |
60 | $2,750 | $1,900 |
Businesses should get quotes from multiple providers to compare costs for their specific situation. Using a broker can help find affordable options tailored to the company’s needs and budget.
Who Needs Business-Owned Term Life Insurance?
Term life insurance can greatly benefit several types of Canadian businesses:
Sole Proprietors and Partnerships
Sole owners or partners without extensive corporate structure rely heavily on each person. Term life insurance can provide crucial protection if an owner dies.
Further reading: Shareholder/Partner Insurance in Canada
Small Businesses
Small companies with under 50 employees are very dependent on key personnel like founders, executives, and technical experts. Losing any of these individuals could significantly impact operations.
Businesses with Debt and Loans
If an owner dies, term life insurance proceeds can pay off business loans, lines of credit, equipment financing, and other debt quickly and seamlessly.
Companies Funding Buy-Sell Agreements
When partners enter buy-sell agreements, term life insurance can provide funds for the remaining partners to purchase the deceased partner’s shares.
Businesses Planning Succession or Transfer
Term life is an affordable way to protect businesses that are transitioning through a sale to new owners or preparing to transfer to heirs.
Tips for Purchasing Business-Owned Term Life Insurance
Follow these tips when buying term life insurance for your Canadian business:
- Get quotes from multiple providers to compare rates. Rates can vary greatly between insurers.
- Work with an experienced broker or advisor to review options and find value. Avoid going direct without expert guidance.
- Consider longer terms (20-25 years) to lock in lower premiums for an extended period of time.
- Bundle with disability insurance (called waiver of premium) in case the insured becomes unable to work.
- Coordinate policies on multiple owners or employees for comprehensive protection.
- Review financing options some insurers offer to spread costs over time.
- Add conversion rights to easily switch your term policy to permanent life insurance policy later on.
- Be honest on medical questions to avoid denial of death benefit claims. Disclose all conditions and history.
How To Claim a Business-Owned Term Life Insurance Payout?
To receive a payout on a term life insurance policy for a deceased business owner or employee, beneficiaries must:
- Notify the insurance provider promptly – Call the insurer as soon as possible after the death occurs. Delayed notification could lead to denial of the claim.
- Submit a claim form – The insurer will provide a proof of death claim document to complete. This will authorize them to review the case.
- Provide a death certificate – Supply an official copy of the death certificate, which can be obtained from the province’s vital statistics office.
- Submit additional documents – The insurer may request medical records, autopsy reports, police reports, or other data to investigate the claim.
- Designate payment instructions – If the business is the beneficiary, provide account details to deposit the tax-free lump sum payout. Or specify other payment instructions.
- Follow up on claim status – Check in regularly during the claims process and provide any other details requested until the payout is issued.
It is crucial to comply with the insurer’s requests and procedures to avoid denial or delays in receiving the term life insurance proceeds. The average claims processing time is 1-2 weeks after submission of all documents. The top reasons claims get denied include undisclosed medical history, Investigation finding that the insured died from high-risk activity excluded from the policy or lapses in premium payments.
Where To Purchase Business-Owned Term Life Insurance?
Canadian businesses have several options when looking to purchase term life insurance:
Direct from Insurance Companies
Major life insurance companies like Sun Life, Canada Life, RBC Insurance, and Manulife sell term life insurance policies online and via telephone sales. Buying directly may offer lower rates but with less personalized guidance.
Insurance Brokers
Independent insurance brokers have a wide range of policies available from numerous insurance carriers. For example, Lifebuzz.ca carefully compares insurance rates and offers unbiased advice to businesses. These brokers often specialize in serving commercial clients, providing tailored insurance solutions to meet their specific needs.
Banks and Credit Unions
Financial institutions that lend to small businesses will commonly offer term life insurance policies to their commercial banking clients as well.
Financial Advisors
Some wealth management firms and independent financial advisors sell term life insurance products alongside other services they offer business clients.
Independent brokers and advisors who work with multiple insurers tend to provide the most suitable options and value for purchasing business-term life insurance.
Business-Owned Term Life Insurance is one of the two main categories of Corporate-owned life insurance policies that Canadian companies can utilize. Term life insurance provides temporary protection for a set period, contrasting with permanent options like Business-Owned Permanent Life Insurance, Business-Owned Participating Life Insurance, and Business-Owned Universal Life Insurance, which offer lifelong coverage. Term policies have lower premiums but no cash value buildup, making them ideal for insuring short or medium-term corporate risks.
Conclusion
Business-owned term life insurance allows Canadian companies to protect against unexpected loss of owners or key employees at affordable rates. The death benefit provides critical funds to settle debts, cover expenses, enact succession plans, and continue operations smoothly.
Term life insurance offers very cost-effective premiums compared to permanent insurance or self-insuring. Policies can be customized with optional riders and lengths to suit a business’s unique situation.
Sole proprietors, partnerships, small businesses, companies with debt, and those planning transitions can benefit tremendously from term life insurance. It provides peace of mind that the business will not suffer financially if a death occurs.
With expert assistance in choosing suitable coverage amounts and terms, Canadian business owners can implement this valuable protection to ensure their company’s future is secure.
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To learn more about protecting your Canadian business with affordable term life insurance, contact the licensed experts at Lifebuzz.ca. Get a personalized quote online or speak with a broker to review your coverage needs today!
Frequently Asked Questions (FAQs) about business-owned term life insurance
When should I consider converting my business-owned term life insurance?
When business needs or goals shift to require lifelong coverage, or you want to access permanent policy's cash value accumulation features.
Can I renew my business-owned term life insurance annually?
Yes, most term life policies allow annual renewals after the initial term ends, with increasing premiums at each renewal.
Is the payout from business-owned term life insurance taxable?
No, death benefit payouts to a business from a company-owned term life policy are received tax-free.
What information do I need to apply for business-owned term life insurance?
You'll need your business financials, details on ownership structure, the insured's demographic and medical history information, and the coverage amount sought.
How long does underwriting take for business-owned term life insurance?
Underwriting typically takes 2 to 4 weeks. It may be shorter for smaller policies or if the insured is young and healthy.
Who should be the beneficiary of business-owned term life insurance?
The insured business is usually named beneficiary to receive proceeds. However, a trust or specific successor can be designated alternatively.
Can I insure multiple employees under business-owned term life insurance?
No, separate individual policies must be taken out on each employee. The coverage is not collective or bundled.
What happens if I miss a premium payment on business-owned term life insurance?
The policy will lapse if payments are missed, ending coverage. Premiums must be paid on time to maintain protection.
How do I file a claim for business-owned term life insurance?
Contact the insurer immediately, submit a claim form, provide required documents like a death certificate, and follow up until the payout is received.
What can disqualify a claim for business-owned term life insurance?
Undisclosed pre-existing medical conditions, deaths from high-risk excluded activities, lapses in premium payments, and failure to document the claim properly.
Do I need a medical exam for business-owned term life insurance?
Insurers may require a medical exam and bloodwork if you are over 50 or seeking higher coverage amounts, to assess risks and pricing.
Can a business buy business-owned term life insurance on a new key employee later on?
Yes, you can take out additional term life policies whenever your business hires new employees that become vital to operations.
What happens to business-owned term life insurance if I shut down the company?
You can transfer the policy to new owners, convert to personal insurance, or surrender the policy for any cash value if permanent. Term life policies terminate.
What medical conditions can impact eligibility for business-owned term life insurance?
Major conditions like cancer, heart disease, diabetes and mental illness can lead to higher premiums or denial of coverage depending on severity.
Can I adjust the coverage amount later on for business-owned term life insurance?
Yes, most policies allow you to increase or decrease the death benefit after the initial purchase by contacting the insurance provider.
What causes a rate increase for business-owned term life insurance?
The main triggers are renewing after the initial term ends or converting from term to permanent coverage. Also, if your health declines.
How does business-owned term life insurance fit into an overall risk management plan?
It can provide affordable coverage for temporary risks like debts, ownership changes, and key employee loss, complementing property and liability insurance.
What happens if my business restructures after buying business-owned term life insurance?
Contact your insurer to review how restructuring affects coverage. You may need to adjust beneficiary designations or policy ownership.
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