When a corporation owns a life insurance policy and is named as the beneficiary, the death benefit is generally paid to the corporation tax-free. Depending on the policy’s adjusted cost basis, some or most of those proceeds can also be added to the corporation’s capital dividend account (CDA). That can let the company pay out tax-free capital dividends to Canadian-resident shareholders.
What is Corporate-Owned Life Insurance?
Corporate-owned life insurance is a policy purchased and owned by a corporation, with the business owner or a key person insured under the policy.
Read More: How Key Person Insurance Works
Corporate-owned life insurance is mainly used to cover business needs. Common uses include replacing a key person, funding a shareholder agreement, paying off debts, or providing cash after an owner dies. Depending on how the policy and estate plan are set up, the proceeds can also end up benefiting the owner’s family or estate.
What are the Key Benefits of Corporate-Owned Life Insurance?
What Happens During a Business Exit?
If you pass away as the owner of a corporation, your business does not die—it continues to exist as a separate legal entity. The Canada Revenue Agency will treat your passing as a “deemed disposition”, meaning that you as owner will be considered as having sold all of your shares in the corporation at fair market value. This will lead to a capital gains tax on these shares. If the shareholders within the corporation want to buy back your shares, there will be a need for cash flow within the corporation. Corporate-owned life insurance can help pay both the taxes and the buy-back of these shares.
Read More: Life Insurance Strategies for High-Net-Worth Canadians
What Types of Corporate-Owned Life Insurance Should I Choose?
Corporate-owned life insurance is available in two categories: Term Life Insurance and Permanent Life Insurance.
Term Life:
- covers the business owner for a set period of five, 10, or 20 years;
- is typically less expensive than permanent life insurance;
- helps protect the business by covering liabilities if the business owner dies during the term;
- offers premiums that generally remain unchanged throughout the coverage period.
Permanent Life Insurance:
- provides coverage for life as long as the policy stays in force;
- can offer guaranteed premiums and death benefits, depending on the product;
- builds cash value on a tax-advantaged basis inside the policy (subject to Canadian tax rules);
- may allow access to that value through withdrawals or policy loans (these can have tax and policy effects);
- can supply long-term cash for estate and business succession planning.
When is Corporate-Owned Life Insurance Not a fit?
Corporate ownership may not be the right choice for you if the business has limited cash flow, the insurance need is mainly personal, or there is a real chance the corporation could be sold, dissolved, or targeted by creditors. Tax results also depend on the corporation, how the policy is structured, and how the proceeds are eventually paid out. Ownership decisions should be reviewed with an insurance, tax, and legal professional.