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Business Structures and Life Insurance

Updated: Jul 27, 2020

In this post we provide a brief overview of why business owners may need or want life insurance policies for tax planning, dealing with business debts, and more.

There are many reasons for which business owners may need or want life insurance in place.

In many cases, business owners have needs like paying taxes at death, equalizing an estate between beneficiaries, paying debts, making a charitable donation, to support dependents, or to support contractual agreements such as key person, shareholder buy-outs, or matrimonial obligations.

Business owners may also want to maximize estate values and enhance wealth through the purchase of a life insurance policy.

Corporate owned life insurance policies offer several benefits, but there are important considerations with this arrangement.

Benefits include tax savings if premiums are paid using dollars derived from an active business income source, and passive income is not generated unless a policy gain is realized on surrendering the policy, a partial surrender, or a policy loan. Finally, the capital dividend account credit means but life insurance proceeds can flow out of the company on a tax-free basis.

However, these benefits must be considered relative to the potentially complex need to accommodate ownership and/or distribution to the right person after death. Creditor protection may be lost, and there could be unexpected tax issues when a corporate policy owner has US person shareholders.

What are the basic tax rules of a corporate-owned life insurance policy?

  • Typically, premiums are not tax deductible

  • Growth in cash values is tax-advantaged

  • Death benefit is received tax-free by beneficiary

  • Death benefit received by a private corporation credits the corporation’s capital dividend account (CDA) to the extent that the death benefit exceeds the policy’s adjusted cost basis at the time of death

  • The CDA allows the Corporation to pay tax free capital dividends to Canadian resident shareholders

Holding companies may be used in corporately-owned life insurance policies to insulate assets from potential creditors of the operating company, to keep earnings reinvested at the corporate level, and for tax planning transactions such as estate freezes.

Hold-co owned policies are most applicable for permanent insurance policies and term policies intended for estate planning.

Let us know if you would like to discuss how corporately-owned life insurance would work in your situation. We look forward to hearing from you!


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