Buy-sell insurance
Insurance that funds your buy-sell agreement, so the remaining owners can buy an owner’s shares if they die or become disabled.
- Money ready when it’s needed
- to buy out an owner’s shares
- Fair value for the family
- paid in cash, not shares
- Control stays with the owners
- shares stay in the business
Buy-sell insurance
Two owners, one plan.
A buy-sell agreement says what happens to an owner’s shares if they die. With a corporate-owned plan, the company holds the insurance, so it has the money to buy back the shares and the family is paid fairly.
While both owners are alive
A buy-sell agreement sets the price and terms, so the corporation can buy back an owner’s shares if they die.A buy-sell agreement sets the price and terms, so the corporation can buy back an owner’s shares.
If Owner B dies
Owner A now owns all the shares. Owner B’s family receives fair value in cash.
Illustration only. Corporate-owned plans can be structured in different ways, and the tax treatment depends on the details. Get tax and legal advice.
Life and disability
Two events, one agreement.
Buy-sell insurance works in two situations. In either one, the agreement is triggered and the insurance funds the buy-out.
Life insurance
If an owner dies
The agreement is triggered and the death benefit funds the purchase of their shares, generally paid as a lump sum. The family receives fair value in cash, and the remaining owners keep the business.
Disability buy-out insurance
If an owner becomes disabled
If they can no longer work in the business, the agreement is triggered once they’ve been disabled for the period it sets. The insurance then funds the purchase of their shares, as a lump sum, in instalments, or both, depending on the plan and your agreement.
The disability period is set in your agreement, often one or two years of continuous disability, to suit the business and the owners. The insurance waiting period is matched to it.
Triggers
When the agreement applies.
A buy-sell agreement can set out what happens to an owner’s shares in several situations. Insurance funds two of them.
Funded by insurance
The policy pays, and the buy-out goes ahead.
- Death
- Disability
Funded another way
Such as savings, a loan or payments over time.
- Retirement
- Disagreement between owners
- Divorce
- Bankruptcy
Structure
How it’s set up.
Most buy-sell plans are owned by the business, as in the diagram above.
The business owns the policies
The business owns and pays for a policy on each owner, and is the beneficiary. This is the most common structure.
The agreement sets the terms
Who buys, how the shares are valued, and when a sale is triggered. Your lawyer drafts it, and we work with them so the coverage matches.
The capital dividend account
When the business receives a death benefit, most of it is generally credited to its capital dividend account. The business can then pay that amount to the estate as a tax-free capital dividend.
Other structures
Owners can also hold policies on each other, or use a holding company or a combination. These suit some businesses, and we look at them with your accountant.
A general guide. Your agreement should say how the capital dividend account is used. Get tax and legal advice for your situation.
Getting started
How it comes together.
We don’t draft buy-sell agreements. We work alongside your lawyer and accountant so the agreement and the insurance fit together.
Agree on the terms
Your lawyer drafts the agreement: who buys, the triggers, and how long a disability lasts before a sale.
Value the shares
With your accountant, set the value of each owner’s shares, or a formula for it.
Put coverage in place
We match life and disability coverage to the value of each owner’s shares.
Review it
As the business grows, the value of the shares changes. We review the coverage with you from time to time so it keeps pace.
Coverage that falls behind the value of the shares leaves a gap the remaining owners have to fund themselves.
Cost
What affects the cost.
Each owner’s age and health
Every owner is insured, so each one’s age, health and smoking status counts.
Coverage amount
Set by the value of each owner’s shares.
Number of owners
More owners means more policies.
Type of coverage
Life, disability or both.
How long it lasts
Term coverage costs less than permanent coverage at the start.
Disability waiting period
A longer waiting period generally costs less.
Is it right for your business?
Who it suits.
May suit you if
- Your business has two or more owners.
- You have a buy-sell agreement, or plan to put one in place.
- You’d rather not fund a buy-out from savings, loans or the business’s cash.
- You want shares to stay with the owners, not pass to heirs who aren’t involved.
Something else may fit better if
- It’s just you, in your own corporation.Business-owned life insurance
- You want to protect the business from losing an employee, not an owner.Key person insurance
Frequently asked questions
All questionsHow does buy-sell insurance work in Canada?
The owners sign a buy-sell agreement that says who buys an owner’s shares, and at what price, if they die or become disabled. Life insurance funds the purchase if an owner dies. Disability buy-out insurance funds it if an owner becomes disabled for the period the agreement sets. Either way, the remaining owners keep the business, and the owner or their family receives fair value in cash. Your lawyer drafts the agreement, and we work with them and your accountant so the coverage matches it.
What are the benefits of having buy-sell insurance for Canadian businesses?
It gives the remaining owners the money to buy an owner’s shares if they die or become disabled, without using savings, loans or the business’s cash. The owner or their family receives fair value in cash, and the shares stay with the owners. It can also reassure employees, lenders and clients that the business will carry on.
Can buy-sell insurance cover multiple partners in a Canadian business?
Yes. Each owner is insured, and the agreement sets how an owner’s shares are divided among the remaining owners.
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.
- Employee group benefits6 minute readNavigating your return to work after long-term disability: a guide to successDiscover essential tips for a smooth and successful return to work after long-term disability, ensuring a confident transition back to your routine.
- 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.
Related to buy-sell insurance
- Key person insurance Protects your business if you lose someone vital to it.
- Business-owned life insurance Life insurance owned by your company, for protection and planning.
- 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.