Key Considerations When Purchasing Corporate Insurance

In our previous discussions, we've highlighted the benefits of corporate-owned insurance and its potential to support your business. Life insurance—particularly in a corporate context—can be a powerful asset, providing a wide array of financial advantages when structured correctly. However, as with any financial decision, there are essential considerations to bear in mind.

Selecting the Right Beneficiary

Choosing the appropriate beneficiary is crucial. Since corporate funds are used to finance this corporate "asset," it’s important to align ownership and beneficiary designations carefully. If your corporation owns and pays for the insurance policy, but you or your spouse are designated as the beneficiary, this creates a taxable shareholder benefit. A taxable shareholder benefit arises when a corporate-owned asset is used for personal gain without appropriate compensation—resulting in a tax liability assessed by the Canada Revenue Agency (CRA). Avoiding such pitfalls requires thoughtful planning to ensure that the intended financial advantages aren't undermined by unexpected tax consequences.

Considering Creditor Protection

While corporate-owned insurance can achieve significant financial objectives, it may leave the policy vulnerable to corporate creditors. To mitigate this risk, careful structuring is needed—one potential solution is to have a holding company own the policy, while designating the operating company as the beneficiary. This approach adds a layer of protection but involves added complexity, which may not always suit your particular circumstances. Alternatively, personally owned life insurance naturally provides stronger creditor protection without the need for these additional layers.

Secure Planning with Professional Guidance

Corporate-owned life insurance can be complex, and it’s wise to engage a knowledgeable advisor to help navigate these intricacies. An experienced advisor can assist you in structuring your insurance strategy effectively, ensuring it aligns with your overall business and personal objectives. Critical questions to consider include:

• Does my shareholder agreement reflect the insurance strategy appropriately?
• Can I leverage this policy to generate tax-free income during retirement?
• Will the corporate-owned policy impact my eligibility for the Qualified Small Business Corporation (QSBC) exemption?
• Upon death, will the proceeds be distributed in a manner that supports my estate planning goals?

Expert guidance ensures these questions are addressed thoughtfully, setting a solid foundation for a successful insurance strategy.

The Long-Term Perspective

It's essential to keep the bigger picture in mind. If you plan to sell the corporation at some point, corporate-owned life insurance can complicate matters. When transferring a policy from a corporation to a shareholder, a deemed disposition occurs, potentially resulting in tax liabilities for the corporation. If a future sale of the business is part of your plan, it is critical to anticipate and address these implications beforehand to avoid unexpected tax consequences.

Conclusion

Corporate-owned life insurance offers significant benefits but comes with unique complexities that require careful planning. Choosing the right beneficiary, considering creditor protection, structuring the plan with professional guidance, and thinking about the long-term future of your business are all vital factors. By approaching corporate insurance thoughtfully, you can harness its full potential while minimizing risks and ensuring it aligns with your broader financial and business strategy.

Next Steps

If you're considering corporate insurance or need assistance with your existing policy, contact Garrett Agencies today. Our professional insurance advisors and tax specialists are here to help you navigate the complexities and ensure your insurance strategy aligns with your goals.