Corporate-Owned Life Insurance in Canada

Corporate-owned life insurance can be an extremely valuable asset for Canadian businesses. This guide will explore the ins and outs of corporate life insurance – how it works, the benefits it provides, how to implement policies effectively, and what business owners need to consider before purchasing coverage.

What is Corporate-Owned Life Insurance in Canada?

Corporate-owned life insurance (COLI) is a policy purchased and owned by a corporation, with a shareholder, owner, or key employee named as the insured individual. The company pays the premiums and receives the tax-advantaged payout if the insured person passes away.

These proceeds can provide liquidity to repay debts, cover revenue losses, fund buy-sell agreements, maintain operations if a central figure dies unexpectedly, and more.

Corporate insurance policies in Canada function similarly to individually owned policies in that they provide a death benefit upon the passing of the insured. However, they offer unique advantages when implemented properly by an incorporated business.

How Does Corporate-Owned Life Insurance Work in Canada?

The mechanics of corporate-owned life insurance policies in Canada are straightforward:

• The incorporated business entity pays ongoing premiums, just like with individual life insurance contracts. Premium costs depend on the age and health status of the insured.
• If the named insured individual passes away, the corporation receives the income-tax-free death benefit payout.
• The company can then issue an equivalent amount to its shareholders tax-free in the form of a capital dividend.
• The death benefit received by the company is not considered taxable income. This provides a key tax advantage.

Proper structuring of the policy is critical to achieving these tax benefits. The business must be named as both the owner and the beneficiary of the policy, while a shareholder, owner, or employee is designated as the insured life.

It’s highly recommended to consult a qualified life insurance advisor to ensure corporate policies are set up correctly.

The Top Benefits of Corporate-Owned Life Insurance in Canada

There are several important financial benefits for Canadian businesses utilizing corporate life insurance policies:

Tax-Deductible Premiums

Premiums paid are usually considered tax-deductible business expenses, providing significant cost savings compared to non-deductible premiums for personally-owned life insurance policies.

This advantage applies specifically when policies are structured properly with the business as owner/beneficiary.

Tax-Sheltered Growth

Many permanent corporate life insurance plans offered in Canada have cash value components that grow on a tax-deferred basis.

This tax-preferred growth within the policy supplements retained corporate earnings. It can provide tax-efficient policy loans as well.

Tax-Free Death Benefit Payout

The death benefit proceeds received by the corporation are not considered taxable income. This is a major benefit.

These proceeds increase the company’s capital dividend account balance. An equivalent amount can then be paid from this account to shareholders completely tax-free.

Potentially Lower Insurance Costs

In some cases, coverage costs may be lower under a corporate policy, especially if the insured individual is relatively young and healthy. Overall premiums can be reduced when paid with pre-tax corporate dollars.

Asset Diversification

The tax-preferred growth within the permanent policy’s cash value provides diversity compared to the company’s regular taxable business assets. This can be beneficial for conservative investment strategies.

Credit Enhancement

Some lenders view business-owned life insurance favourably as it shows prudent planning. The coverage may improve loan terms and borrowing capacity.

Common Uses of Corporate-Owned Life Insurance in Canada

There are several strategic uses of corporate-owned life insurance policies within Canadian businesses:

Debt Repayment

Proceeds from a corporation-owned life insurance policy can repay any outstanding debts or loans if a shareholder or owner passes away unexpectedly. This can provide peace of mind that any personal guarantees will be covered.

Buy-Sell Agreement Funding

The tax-free payout from a corporate-owned policy can fund any buy-sell agreements triggered when an owner/shareholder dies. This ensures the transaction can be completed smoothly.

Key Person Protection

The death benefit could help offset potential revenue losses and cover replacement costs if a key employee or member of the management team were to die prematurely.

Business Continuity

In the event of an unexpected death of an owner or top talent, the life insurance proceeds to keep the company running and maintain stability.

Businesses can establish executive bonus plans funded by life insurance to provide key employees additional compensation and support business continuity planning. 

Succession Planning

Corporate life insurance can fund the eventual sale, transfer to family members, or wind-down of the business when the current owner(s) prepare for retirement or an exit.

For example, business partners can take out policies on each other’s lives and enter into a cross-purchase agreement, where the surviving partner uses the life insurance proceeds to buy the deceased partner’s shares from their estate.

Emergency Liquidity

Accessing tax-free death benefits or tax-preferred policy loans can provide much-needed liquidity in the case of emergencies or downturns.

Funding Shareholder Buyouts

If certain minority investors or partners need to be bought out, tax-free death benefit proceeds can facilitate these redemptions smoothly.

Read more: Partner Insurance in Canada

Types of Corporate Life Insurance Policies in Canada

There are two main categories of corporate-owned life insurance policies offered by insurers in Canada:

Term Life Insurance

Term life insurance provides temporary coverage for a specified period of time, such as 10, 20, or 30 years.

• It offers the lowest cost life insurance option for Canadian businesses.
• Premiums are guaranteed not to increase during the term period.
• There is no investment component or cash value built up.
• At the end of the term, coverage can be renewed annually but at much higher rates.
• Term policies are a good choice for covering temporary business risks like loan repayment.

Average premiums for healthy individuals generally range from $15 – $40 per month per $100,000 of coverage.

Permanent Life Insurance

Permanent life insurance is designed to provide lifelong protection as long as premiums are paid.

• It offers lifetime coverage for insureds.
• Premiums are typically higher than term policies.
• It accumulates cash value that grows tax-sheltered within the policy.
• Types of permanent corporate policies include whole life, universal life, and participating life.
• Permanent coverage is ideal when permanent protection is needed.

Average monthly premiums for $100,000 of coverage can range from $60 – $100 for healthy insureds.

Within these two main categories there are variations in products offered by insurers in Canada. Work with an experienced advisor to understand all options.

How Much Does Corporate-Owned Life Insurance Cost in Canada?

The premiums for corporate-owned life insurance policies will depend on several factors:

Type of Policy

Term life insurance generally has lower premiums compared to permanent life insurance policies. See the table below for average monthly costs per $100,000 of coverage.

Age of the Insured

Younger insureds typically qualify for lower premiums. Rates increase as the insured ages, especially after age 50.

Health Status

Insurers will assess the insured’s medical history and health, including asking about any chronic conditions or family health issues. Healthy applicants get lower rates.

Smoker Status

Most insurers charge higher premiums for insureds who smoke tobacco. Some may decline coverage entirely for smokers.

Gender

Due to generalized mortality data, premiums are often lower for female insureds compared to male insureds of the same age.

Coverage Amount

Policies with higher death benefit amounts will have proportionally higher overall premiums.

Policy Term

For term life insurance, longer terms like 20 or 30 years have higher premiums than shorter ten-year terms.

Payment Options

Annual lump-sum payments may qualify for a discount compared to monthly installments.

Average Corporate-Owned Life Insurance Premiums

Here are examples of typical monthly premium costs per $100,000 of coverage for healthy individuals:

Premiums can cost 15-30% less when paid with pre-tax corporate dollars rather than after-tax personal dollars.

Actual premiums will vary based on the insured’s specific age, health, gender, smoking status, and other underwriting factors.

Work with an experienced insurance advisor to understand potential policy pricing based on your situation.

What Types of Businesses Should Consider Corporate-Owned Life Insurance in Canada?

There are several classes of privately held companies that can strongly benefit from implementing corporate-owned life insurance policies:

• Owner-managed companies
• Family businesses
• Private corporations
• Professional corporations
• Partnerships
• Closely-held companies
• Businesses with buy-sell agreements in place
• Companies highly dependent on key employees or shareholders

However, businesses with certain complex ownership structures, like holding companies or stacked/tiered entities, may require more specialized planning and advice when it comes to purchasing policies.

Here are some signs your Canadian business could benefit from corporate-owned life insurance policies:

• Reliance on one or more owner/shareholders to operate and generate revenue
• Debt obligations and liabilities tied to specific shareholders
• Buy-sell agreements in place to facilitate ownership transfers upon death
• Difficulty recruiting and the long training periods required for the replacement of key employees
• Shareholder agreements that provide for redemptions or buyouts in certain events
• Potential estate tax exposure for majority shareholders

What are the Potential Drawbacks of Corporate-Owned Life Insurance to Consider?

While corporate-owned life insurance offers many benefits for privately-held companies, there are some limitations to keep in mind:

Long-Term Commitment – Permanent life insurance policies require a long-term commitment from the business to maintain the coverage. Companies need to budget for stable premium payments.

Accounting Complexities – There are specific accounting rules surrounding policies with cash value components. This can complicate bookkeeping and financial reporting.

Transfer Issues – If policies need to be transferred because of restructuring, mergers & acquisitions, or divestitures, it can create tax exposure and complications.

Short-Term Businesses – Startups and unstable businesses may not benefit from permanent policies that require long-term retention and premium outlays.

Shareholder Alignment – Proceeds must align with how the buy-sell agreement is structured and each owner’s share percentage.

It’s critical to engage qualified legal, accounting, and tax professionals when assessing corporate coverage to avoid any pitfalls.

Detailed Steps to Purchasing Corporate-Owned Life Insurance in Canada

If corporate-owned life insurance makes sense for your privately-held Canadian business, follow this detailed process:

1. Review Your Business Structure and Goals – Make sure this type of coverage aligns with your corporate structure and objectives. Clearly identify how the death benefit will address specific risks.

2. Select an Insured Person – Determine the most suitable shareholder, owner, or employee to insure based on value to the company.

3. Calculate Required Coverage Amount – Assess debts, revenue impact, net worth, and other factors to calculate the appropriate death benefit amount.

4. Choose Between Permanent and Term Life – Weigh factors like budget, time horizon, cash value needs, and duration of need to select appropriate policy types.

5. Compare Premium Costs – Account for the owner’s age, health, smoker status, and other details to get accurate quotes.

6. Model Payment Scenarios – Project premium outlays over time under different funding scenarios to determine affordability.

7. Review Policy Details – Vet the fine print related to renewals, conversions, exclusions, riders, loans, and investment options.

8. Designate Policy Owner/Beneficiary – Formally name the business entity as sole owner and beneficiary. Never individual shareholders or employees.

9. Fulfill Insurability Requirements – The insured will need to provide a medical history and undergo potential exams or fluids testing.

10. Formally Document Objectives – Detail how policy aligns with buy-sell terms, shareholder agreements, succession plans, or other goals.

11. Consult Professionals as Needed – Seek guidance from financial planners, accountants, lawyers, and insurance advisors.

12. Review Application Carefully – Verify all corporate policy details before signing and submitting paperwork.

13. Pay Initial Premium – Submit initial payment to put coverage into force after insurer approval.

14. Schedule Ongoing Premiums – Set up automatic withdrawals for future premiums to maintain the policy.

15. Store Documents Properly – Keep policy documents, beneficiary designations, and related records accessible but secure.

16. Report Coverage to Accountant – Inform your accountant of the policy details for proper treatment of the financial statement.

17. Review the Policy Annually – Assess the policy as part of yearly planning to ensure it still meets the company’s needs.

Key Considerations When Funding Corporate-Owned Life Insurance Premiums

For privately-held companies, a few aspects to weigh when funding corporate policy premiums:

• Current Cash Flows – Match the premium outlays to regular cash flow cycles if possible. Avoid straining the business in the near future.
• Budget Horizon – Factor the annual costs into longer-term budgets and forecasts. Ensure sufficient funding ability.
• Proper Cost Allocations – Distribute premium costs appropriately across departments or business units depending on purpose.
• Tax Bracket Benefits – Analyze the potential tax deductions against the owner’s personal income tax rates.
• Private vs. Corporate Payments – Consider the merits of corporate premium payments vs. owner-funded payments.
• Prepayment Discounts – Some insurers offer discounted rates for lump-sum annual payments.
• Policy Loans – Utilize policy loans with care as collateral if needed in temporary emergencies vs. surrendering coverage.

Tax Considerations for Corporate-Owned Life Insurance in Canada

A few key tax considerations surrounding corporate-owned life insurance policies:

• Premiums are usually fully tax-deductible to the corporation.
• Investment earnings grow tax-sheltered within permanent policies.
• Accessing cash value via policy loans does not trigger taxes.
• Death benefits received by the corporation are not taxable income.
• Proceeds paid to shareholders via capital dividends are tax-free.
• Policy transfers between related corporate entities can result in taxes on gains.
• There are specific T2 reporting requirements surrounding COLI holdings.
• Improperly structured policies can result in the loss of tax advantages.

Given the complex tax impacts, consult qualified accounting and legal tax professionals when implementing corporate-owned life insurance.

Critical Mistakes to Avoid With Corporate-Owned Life Insurance Policies

There are some common pitfalls that business owners should sidestep:

• Naming individual shareholders as beneficiaries rather than the corporation
• Ceding ownership/control of the policy to employees or shareholders
• Failing to document how proceeds will align with buy-sell terms
• Not reviewing insurability requirements before implementation
• Being unaware of important policy conversion timelines or renewal provisions
• Funding premiums inconsistently, leading to unexpected lapses in coverage
• Assuming death benefits are always 100% tax-free without proper structuring

Avoiding these mistakes comes down to thorough planning with competent legal, tax and insurance professionals.

Final Tips for Purchasing Corporate-Owned Life Insurance

As a final summary, here are best practices business owners should follow:

• Thoroughly assess risks to be addressed and the amount of coverage needed
• Take time to calculate tax advantages in detail based on entity structure
• Include legal counsel to review any buy-sell agreements or shareholder terms
• Consult an experienced tax accountant on accounting and reporting treatment
• Work with an insurance advisor to structure the optimal policy type and ownership
• Document detailed plans for how death proceeds will be utilized
• Review insurability requirements and any health issues early
• Allow sufficient time for applications to be reviewed and approved
• Have a long-term premium funding strategy in place
• Be prepared to provide ongoing medical updates to maintain coverage

The decision to implement corporate life insurance should not be taken lightly. But with prudent analysis and guidance from professionals, it can profoundly strengthen privately-held firms and secure their future.

Conclusion

For owners looking to protect their business, corporate-owned life insurance deserves consideration. This extensive guide provided a comprehensive overview of how corporate policies function, what benefits they offer, when they make sense, and how to judiciously implement them.

With careful planning and expert support, corporate life insurance can provide tax advantages, stability, and business continuity. For tailored guidance based on your specific situation, reach out to an advisor who specializes in supporting privately-held companies.

Get Expert Guidance on Business Life Insurance in Canada

For a detailed consultation about how corporate life insurance could benefit your company, connect with a trusted advisor at Life Buzz.

As Canada’s #1 life insurance news source and advisory service, LifeBuzz can provide strategic, customized solutions tailored to your specific corporate structure and planning needs.

Our team of dedicated experts make it easy to determine if corporate-owned policies align with your goals and risk profile. We’ll assess your coverage needs, compare top providers, and ensure optimal implementation.

Don’t leave your company’s future to chance. Click here to schedule a free consultation and discuss how corporate life insurance can provide tax-preferred growth while protecting your business for the long run.

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