Most people view corporate life insurance policies as an income replacement upon death. Other perceptions include coverage for partnership buyout agreements, giving an umbrella to key people or as an estate equalizer. While this is true, it can also provide a host of tax benefits and safety nets that many people don’t at first consider.
Canadians with a high-net worth value may already have sufficient insurance by virtue of the assets that they possess. So, it may seem unnecessary to get even more insurance for reasons of traditional risk mitigation.
Depending on your situation, this may very well be true. But, there are some things you can mull over and decide if it’s worth looking into. Mainly, to consolidate funds in satisfying loans and debts without burdening the company or other beneficiaries. However, there are a host of delightful perks.
Reasons to Get Corporate-Owned Life Insurance
First, corporate-owned life insurance can be incredibly tax-effective. You not only earn passive wealth within a company, on top of regular income but also allow access to that wealth tax free. This is particularly poignant and desirable when your heirs and beneficiaries come into the picture.
Corporate Earnings vs. Personal Income
If you’re a business owner, you may very well understand how this all works. For instance, that the profits you retain or surplus cash that comes in will often go into investments that incur a heavy tax rate. This will be particularly piquant when you have a higher marginal tax rate than the whole of your business and don’t require the extra income.
Some owners that experience this situation take advantage of the low corporate tax rates on active business income by saving money within the corporation. All this accomplishes, however, is a tax deferral. It doesn’t do much to prevent sacrificing your capital to taxes.
Other Plusses to a Corporate-Owned Life Insurance Policy
There are many other income tax advantages to getting corporate-owned life insurance as well. First of all, the paid premiums with corporate after-tax money have a much lower tax rate than your personal tax rate. Having a corporate-owned life insurance policy helps to lighten the load of how much money goes into paying personal taxes.
Rates in Ontario
In Ontario, the applicable corporate tax rate is about 15% and investment income is around 50%. For top individual tax rates, they’re around 53.5%. This means that it’s much more cost-effective to get your policy through the company than it will to have it out of your own pocket.
Distributed Property Values
Also, in addition to foregoing higher tax rates, another advantage is in regards to disposing or dispensing of your estate and property upon death. Canadian federal law requires you to sell or distribute properties at a fair market value.
Dictations of Property Value
In regards to shares of a corporation which owns a life insurance policy, the Income Tax Act will dictate this property value. The life insurance policy provides cash surrender immediately before death to make up for these values.
In general, this value will be much less than the policy’s payout. It will also be less than the value of the property. Had it not purchased the life insurance policy, this would have been otherwise accrued by the corporation.
Taxes after Death
And, depending on post-mortem planning, this issue of paying out the kazoo accentuates the problem. This can put undue pressure on beneficiaries and heirs when you pass away. So, it’s best to have a solid plan of action upon the event of your death.
A Viable Solution
One of the best ways to solve this issue is to invest a portion of your profits and capital into a tax-exempt permanent life insurance policy. While it may seem frivolous to invest in yet another insurance policy, consider the following two benefits of doing such a thing:
- Your life insurance policy grows in value, which gives it money-saving power that accrues without incurring additional taxes. All this distributes between everything you need it to when you pass away.
- The proceeds payable upon your death go into your estate as a tax-free capital dividend. This will comprise a significant portion of the total valued amount, if not all of it. Plus, your heirs, business and other beneficiaries won’t have to worry about paying additional fees or taxes.
As a result, purchasing this kind of life insurance will help lessen taxes payable at death. These taxes occur in relationship to the shares of a private corporation. Therefore, this often leads to lower valuations for the corporate shares than had there been no life insurance to start.
Trepidatious Business Owners
If you’re a business owner and uncomfortable with the idea, there are some things to consider. It’s not at all unusual for business owners to be trepidatious about tying up profits into an illiquid investment, like a life insurance policy. It locks it in without any latitude for movement of funds.
Cautious Is Always Wise
First, you are correct to be hesitant. Placing a significant portion of the corporation’s wealth into one financial product seems unwise and unsound. However, it can serve to pay off debts with the policy as collateral for moneys borrowed. This provides a security net for the continuation of the company and other beneficiaries once you are no longer among the living.
Tax Leverage Strategies
By using the tax leverage power of a life insurance policy, you’ll acquire protection for your assets while preserving reserves of surplus cash. This kind of a strategy can be invaluable in the case of an accidental or unexpected and sudden death.
If after you consider all these advantages and you’re still skeptical about taking out a corporate-owned life insurance policy, perhaps it will be the best decision. But, if you have any doubts or see it as a potential plus for you, contact your accountant, attorney or other professional financial advisor. You never know, it may be the best business decision you’ll make.