Business-owned life insurance is a type of policy where a business is the owner and beneficiary of a life insurance policy on the lives of one or more of its employees or principals. This arrangement is used by businesses for various strategic financial planning purposes, including:
Key person insurance
To protect the business against the financial loss that would result from the death of a key employee whose knowledge, work, or overall contribution is extremely valuable to the company. The benefit can be used to cover the costs of finding and training a replacement, and to offset the loss of revenue or increased expenses incurred during the transition.
Funding buy-sell agreements
To fund a buy-sell agreement among business owners or partners, ensuring that there are sufficient funds to buy out the deceased partner’s share of the business from their estate, thus allowing for a smooth transition of control and ownership.
Executive benefit plans
To provide supplemental retirement benefits or other benefits to select employees. In this case, the life insurance policy may be used as a vehicle for accumulating cash value that can be used to fund future benefits.
Business continuity planning
To provide financial stability and support for the continuation of the business in the event of the death of an owner or key individual, ensuring that the business can meet its obligations and continue operating.
Premiums paid by the business generally aren’t tax-deductible, and the death benefit is generally received by the business tax-free. For a private corporation, the death benefit less the policy’s adjusted cost basis is credited to its capital dividend account (Income Tax Act s. 89(1)).