Maximizing Corporate Life Insurance for Your Financial Success

Business insurance agent talking to business owners
Business insurance agent talking to business owners
Cody Vass
Director/Financial Advisor

As a dynamic and ambitious team at Goald & Co Financial, we understand the importance of staying ahead in the ever-evolving world of financial planning. Today, we're excited to share some valuable insights regarding corporate life insurance, a powerful tool that can not only protect your financial future but also enhance your wealth-building strategies.

Insight #1: You can buy more insurance with corporate dollars

One of the key advantages of corporate life insurance is its ability to maximize your insurance coverage while minimizing the financial strain on your business. The concept of tax integration plays a pivotal role in this scenario. In essence, this means that a corporation can potentially pay for life insurance with fewer pre-tax dollars compared to an individual in the top tax bracket.

For example, a Canadian Controlled Private Corporation (CCPC) in British Columbia can purchase a $10,000/year policy by earning only $11,564 before tax, whereas an individual in the top tax bracket would need to earn $19,231 before tax to cover the same premium. This difference means that, using corporate dollars, you can acquire more insurance coverage while maintaining your cash flow.

In British Columbia, CCPCs enjoy a favorable tax rate on their first $500,000 of active income. This advantageous tax structure allows you to stretch your corporate dollars further when investing in life insurance.

Insight #2: Tax-free transfer of insurance payout

To receive insurance proceeds tax-free, a corporation should be both the owner and beneficiary of the policy. This allows you to protect both corporate and personal interests. When an insurance payout is received by the corporation, a notional account called the Capital Dividend Account (CDA) is credited. The CDA can be withdrawn tax-free from the corporation immediately or at a later date, providing significant financial flexibility.

Insight #3: Tax-sheltered growth of premium deposits

In addition to tax savings on premiums and tax-free withdrawals from the CDA, corporate life insurance offers another tax advantage: the ability to grow premium deposits tax-sheltered. Many insurance policies allow extra deposits, making them preferred tools for accumulating corporate assets. Properly documented on financial statements, these assets can benefit your business and shareholders both now and in the future.

Insight #4: An asset on the balance sheet

Corporate life insurance can enhance your banking relationships and increase your lending capacity by appearing as an asset on your balance sheet. Over time, it can yield more than traditional investments, allowing you to control investment decisions and manage risk based on your preferences.

Recent Changes To Corporate Life Insurance

Recent changes in tax rules have made corporate-owned life insurance even more attractive. Since 2018, the small business limit has been reduced for corporations with significant passive investments. Corporate-owned life insurance can help safeguard your small business rate, even though the cash value of the policy may contribute to overall taxable gains upon death.

Other Uses of Corporate Life Insurance

  • Corporate-owned life insurance provides a range of creative planning options. For instance, you can use life insurance tracking shares to reduce or eliminate the tax effect of the Cash Surrender Value (CSV) on the death of the insured.
  • Additionally, you can structure shared ownership policies to optimize the benefits for both the corporation and shareholders.

Possible Pitfalls

While corporate-owned life insurance offers numerous benefits, it's essential to be aware of potential pitfalls. These include:

  • The necessity for the corporate owner to be the same as the beneficiary, considerations related to the longevity of the corporation, and issues related to the residency of the corporation.
  • Proper planning and consultation with experts can help mitigate these concerns.

6 Scenarios to Use Corporate Life Insurance

We've highlighted six scenarios where corporate life insurance can be an invaluable financial tool:

  • Buy-Sell Agreements: Use life insurance proceeds to facilitate the buyout of deceased shareholders' shares.
  • Policy as Collateral for a Corporate Bank Loan: Access policy value while the insured is alive, with tax benefits and potentially tax-deductible interest.
  • Policy as Collateral for a Personal Loan: Allow shareholders to use the corporate policy as collateral for personal loans, with caution and accounting for potential tax implications.
  • Getting Yearly Dividends: Receive yearly dividends from the policy, spreading out tax obligations.
  • Partial Redemptions on the Policy: Unlock policy value over time, with tax considerations and coverage reduction.
  • Accessing Cash Values in Case of Disability: Access cash values tax-free in the event of the insured's total disability, with attention to potential effects on death benefit coverage.

Consult the Advisors To Maximize Your Financial Success with Corporate Life Insurance

To make the most of corporate life insurance, be prepared to provide the necessary documentation, consult with professionals, and ensure clear directions within shareholders' agreements for buyout scenarios.

In conclusion, corporate-owned life insurance is a powerful financial tool that can provide protection, tax advantages, and wealth-building opportunities. With our expert guidance and collaboration between financial advisors, accountants, lawyers, and insurance specialists, you can harness the full potential of corporate life insurance to secure your financial future and achieve your goals. Explore the possibilities and reap the benefits—your financial future deserves nothing less.

Contact Goald & Co Financial today and set the strategy to maximize your financial success when buying corporate life insurance.

Frequently Asked Questions

1. What happens when selling or winding up your corporation?

Selling or winding up a corporation can have tax consequences, and the cash value of the insurance policy can affect the sale price. It's important to consider the potential purchaser's willingness to pay for a policy on another person's life and to involve professionals, like actuaries, to navigate these situations effectively.

2. What happens on cancelling or redeeming the policy?

If you decide to cancel or redeem a corporate-owned life insurance policy, be prepared for potential tax implications. Gains are treated as ordinary income when the Cash Surrender Value (CSV) exceeds the Adjusted Cost Basis (ACB). Careful planning and consultation with insurance advisors and accountants can help you make informed decisions.

3. Can Corporate Life Insurance impact Company's Capital Gain Exemption?

Corporate life insurance can impact your company's capital gains exemption. Holding the policy within a holding company instead of the operating company can help you retain this exemption.

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