Corporate-Owned Insurance Policies
By Jennifer Campbell, Articled Clerk
This article was originally published in the "Central Nova Business News", January, 2012 edition.
As a business owner, your business is likely important to you both personally and financially.
The fact that it is important means that you should plan for what will happen to it upon your death or disability. Often the plan includes purchasing an insurance policy. This may be a practical solution, but it is important not to overlook issues that are unique to a business owner operating through a company.
The first such issue is whether the insurance policy should be owned by you personally or owned by your company. One advantage of having your company own the policy is that your company’s after-tax dollars are more valuable than your personal after-tax dollars. As a result, your company can purchase the same policy as you could individually, but much more economically.
Corporate-owned life insurance policies tend to be beneficial and the proceeds can be transferred to your estate tax-free. Disability insurance should generally be owned personally because of the tax consequences that could arise upon transfer of the proceeds to you. An exception is if the insurance proceeds are to be used by the company to cover overhead expenses in your absence.
In the case where there are multiple shareholders, corporate-owned insurance policies for all owners may be beneficial. One reason for the benefit is that there may be a shareholders’ agreement in place which requires the company to buy-out a disabled shareholder or a deceased shareholder’s estate. Corporate-owned polices may prevent liquidation or debt where the funds are not otherwise available.
Insurance policies owned by your company may also be worth considering if it is important that the business survives your disability or death. If you are no longer able to work every day, the business may suffer unless someone is readily available to fill your role. If your family members or employees are not qualified to do this right away, it may be necessary to hire an external manager. If the company does not otherwise have the funds necessary to pay this person, insurance proceeds may be the answer.
If you are the sole shareholder, and you or your family plan on selling or winding-up the business upon your disability or death, then corporate owned insurance policies may have little value other than the ability to purchase the policy with a more valuable after-tax dollar.
Even if corporate-owned insurance policies seem desirable, it is important to discuss the issue with advisors. For example, if there are multiple shareholders and no shareholders’ agreement in place, advice on the benefits of entering into such an agreement should be obtained. Further,your corporate structure may need to be reviewed as the value of the policy could negatively impact whether you qualify for the capital gains exemption available on the disposition of qualified small business corporation shares. In that case, owning the policy through a holding company may be an option. As well, the terms of the policy should be carefully considered: the value of many policies is based upon the insured’s salary, but the value may be more appropriately based on the company’s income. Finally, there may be negative consequences of owning the policy through the company that you should be made aware of, such as the policy being vulnerable to the company’s creditors or potential tax exposure if the policy is ever
transferred to you personally.
This article is intended for information purposes only and is not intended to be legal advice. We suggest you contact a lawyer for advice on your particular business and circumstance.