Business-owned life insurance
Life insurance your corporation owns and pays for, to protect the business and pass value on to your family.
- Paid with corporate dollars
- often taxed at a lower rate than your personal income
- Tax-free to the business
- in most cases, when it’s paid
- A tax-free path to your family
- through the capital dividend account
Business-owned life insurance
How the money moves.
When your corporation owns the policy and is its beneficiary, it pays the premiums with corporate dollars and receives the benefit. Most of that benefit can then pass to your shareholders or your estate tax-free.
Your corporation owns the policy and pays the premiums to the insurance company. When the insured person dies, the insurer pays the benefit to the corporation, generally tax-free. The corporation’s capital dividend account is credited with most of it, and that amount can be paid to the shareholders or the estate as a tax-free capital dividend.
The benefit stays with the business if it needs the money, or passes to your family, generally with little or no tax.
Illustration only. The credit is the death benefit less the policy’s adjusted cost base. Get tax advice for your situation.
Uses
What it can do.
One policy can do several jobs for your business, and often does more than one at once.
Protect against losing a key person
Money to replace lost revenue and recruit if someone the business relies on dies.
Key person insuranceFund a buy-sell agreement
The business can buy back an owner’s shares, and their family receives fair value.
Buy-sell insuranceRepay business loans
The benefit can pay off loans and lines of credit, so debt doesn’t fall on the business or the remaining owners.
Secure a loan
A permanent policy can be assigned to a lender as collateral, so the business can borrow against it.
Pass wealth to your family
Through the capital dividend account, most of the benefit can reach your shareholders or estate tax-free.
Diversify the business’s assets
A permanent policy is an asset the company owns. Its cash value can grow tax-deferred, within limits, alongside the business’s other investments.
Types
Term or permanent.
Both can be owned by your business. The right one depends on how long the need lasts.
| Feature | Term life insurance | Permanent life insurance |
|---|---|---|
| Coverage | For a set period | For life |
| Cost | Usually costs less at the start | Usually costs more |
| Cash value | None | Builds over time, and the business can use it |
| Payments | Fixed for the term | Fixed or flexible, depending on the plan |
| Often used for | Loans, key people, and buy-sell agreements for a set period | Estate planning, long-term buy-sell agreements and a corporate asset |
| Later | Can often be converted to permanent coverage | Stays in place as long as it’s paid for |
| More about each type | Term life insurance | Permanent life insurance |
Term life insurance
- Coverage
- For a set period
- Cost
- Usually costs less at the start
- Cash value
- None
- Payments
- Fixed for the term
- Often used for
- Loans, key people, and buy-sell agreements for a set period
- Later
- Can often be converted to permanent coverage
Permanent life insurance
- Coverage
- For life
- Cost
- Usually costs more
- Cash value
- Builds over time, and the business can use it
- Payments
- Fixed or flexible, depending on the plan
- Often used for
- Estate planning, long-term buy-sell agreements and a corporate asset
- Later
- Stays in place as long as it’s paid for
Using the cash value
With permanent coverage, the business can generally use the cash value through a policy loan, a withdrawal or as collateral for a bank loan. Each one affects the death benefit and can have tax consequences, so we’ll explain the trade-offs first.
Structure
How it’s set up.
The tax advantages depend on how the policy is owned, so it’s worth getting the structure right from the start.
The corporation owns it
The corporation applies for the policy, owns it and pays the premiums.
The corporation is the beneficiary
The benefit is paid to the corporation. This is what allows the credit to its capital dividend account.
Ownership and payment stay together
If the corporation pays for a policy that a shareholder or another company owns, the cost can be taxed as a shareholder benefit.
How it’s taxed
Premiums generally aren’t tax-deductible. The benefit is generally received tax-free, and most of it can be paid out as a tax-free capital dividend.
A general guide. We work with your accountant on the right structure for your business.
How much
What sets the amount.
The amount depends on the jobs you want the policy to do. These are the questions we work through with you.
Key people
What would it cost the business to lose someone it relies on?
Shareholders’ interests
What are each owner’s shares worth under your buy-sell agreement?
Business debts
Which loans and lines of credit would need to be repaid?
Your estate plans
How much do you want to pass from the corporation to your family?
The coverage amount is usually the total of the jobs you want the policy to do.
Cost
What affects the cost.
Age
Rates rise with the insured person’s age.
Sex
Rates differ for men and women.
Health and smoking
Their answers to the health questions.
Occupation
Higher-risk work can raise the cost.
Coverage amount
The larger the benefit, the higher the premium.
Type and length
Term costs less than permanent coverage at the start.
Is it right for your business?
Who it suits.
May suit you if
- You own a corporation, including one where you’re the only shareholder.
- You want to pay for coverage with corporate dollars.
- Your business has loans, partners or key people to protect.
- You want to pass value from the corporation to your family.
Something else may fit better if
- You need coverage for personal needs, such as your mortgage or your family’s income.Term life insurance
- You want to protect the business if an owner can’t work.Business-owned disability insurance
Frequently asked questions
All questionsWho should be covered by business-owned life insurance?
Anyone whose death would significantly affect the business’s finances. This usually includes owners and founders, key executives, and employees whose skills or knowledge the business relies on.
How much business-owned life insurance coverage do I need?
It depends on the jobs you want the policy to do, such as replacing a key person, funding a buy-sell agreement, repaying business debts or passing value to your family. The coverage amount is usually the total of those jobs, and we work through them with you.
What are the tax implications of business-owned life insurance?
Premiums generally aren’t tax-deductible, and the death benefit is generally received tax-free. When the corporation owns the policy and is its beneficiary, the benefit, less the policy’s adjusted cost base, is generally credited to its capital dividend account and can be paid to shareholders or the estate as a tax-free capital dividend. If the corporation pays the premiums but a shareholder owns the policy or is its beneficiary, the cost can be taxed as a shareholder benefit. Get tax advice for your situation.
What happens to a business-owned life insurance policy if a key person leaves the company?
The corporation can generally keep the policy, use it for a different purpose, transfer it, for example to the person it covers, or cancel it. A transfer can have tax consequences for the corporation and the new owner, so get tax advice before making one.
Can a business access the cash value of permanent life insurance?
Yes. With permanent coverage, the business can generally use the cash value through a policy loan, a withdrawal or as collateral for a bank loan. Each one affects the death benefit, and a policy loan or withdrawal can be taxable. Growth inside the policy is generally tax-deferred, and in an exempt policy it doesn’t count as the business’s passive income each year.
Related articles
All articles- Business-owned life insurance4 minute readKey considerations when purchasing corporate insuranceEssential considerations for purchasing corporate insurance, including beneficiary selection, creditor protection, and strategic planning, to maximize the benefits and minimize the risks for your business.
- Business-owned life insurance4 minute readCorporate insurance: a strategic advantage for your businessDiscover how corporate-owned life insurance can protect your business, save on taxes, and provide strategic financial advantages.
- Life insurance5 minute readLeveraging life insurance: turning protection into a financial strategyLeveraging a permanent life insurance policy allows you to access liquidity, enhance tax efficiency, and strengthen estate planning while keeping your coverage intact.
Related to business-owned life insurance
- Key person insurance Protects your business if you lose someone vital to it.
- Buy-sell insurance Funds a buy-sell agreement if an owner becomes disabled or dies.
- Business-owned disability insurance Keeps your company going if an owner or key employee is disabled.
- Tax and estate planning Plan how your wealth passes on, and reduce the taxes along the way.
A question about your coverage? Ask us.
No obligation. We’ll tell you plainly what we think, including when you already have what you need.