Corporate Life Insurance for Business Owners
Corporate-owned life insurance can be a powerful planning tool for Canadian business owners, but choosing a policy is only one part of the process.
The bigger question is how the insurance fits into the corporation, the business owner's long-term objectives and the other assets and strategies already in place.
Should excess corporate cash continue accumulating or be invested elsewhere? Is permanent insurance appropriate? How much premium can the corporation comfortably commit? Is the objective primarily estate value, liquidity, business protection or retirement planning? Could future borrowing against the policy become part of the strategy?
These are very different questions from simply asking how much a life insurance policy costs.
At LifeSimple, we help incorporated Canadian business owners understand these decisions, compare their options and determine whether corporate-owned life insurance deserves a place in their broader strategy.
Corporate Insurance Starts With the Business Owner
There is no single corporate life insurance strategy that works for every business owner.
A corporation generating significant excess cash may have very different objectives from an owner preparing to sell a business. Someone focused on leaving an estate may require a different policy design from someone interested in maintaining future access to capital.
Before recommending a solution, it is important to understand questions such as:
- How much cash is accumulating inside the corporation?
- How much liquidity does the business need to maintain?
- What is the owner's existing insurance need?
- Is the objective primarily protection, estate value, retirement planning or a combination?
- How long can the corporation comfortably fund the strategy?
- Does the owner expect to access policy value during their lifetime?
- Could financing eventually form part of the strategy?
- How does the strategy fit alongside the owner's other corporate and personal assets?
The answers help determine whether life insurance is appropriate at all and, if it is, how the policy should be structured.
Could Corporate-Owned Life Insurance Make Sense for Your Business?
Understanding how corporate life insurance works is one thing. Knowing whether it makes sense for your corporation is another.
Speak with an experienced Canadian life insurance advisor about your business, your goals, and how corporate-owned insurance might fit into your long-term plans.
Book a 30-Minute Corporate Strategy Meeting
Prefer to email us directly? Send us your questions. No obligation.
More Than an Insurance Quote
For straightforward personal insurance, comparing premiums and coverage can sometimes provide much of the information someone needs.
Corporate insurance can be considerably more involved.
The corporation may own the policy, pay the premiums and be named as beneficiary. A permanent policy may accumulate cash value over many years. At death, the corporation may receive the insurance proceeds, and a portion of the death benefit may potentially create a credit to the corporation's Capital Dividend Account, subject to applicable tax rules.
Participating whole life policies can also be designed differently depending on the owner's priorities. Two policies with similar premiums can produce different combinations of early cash value, long-term cash value and estate value.
That is why we believe corporate insurance should begin with strategy and policy design rather than simply finding an insurance quote.
Corporate-Owned Participating Whole Life
Participating whole life insurance is one of the permanent insurance solutions frequently considered by incorporated business owners.
The policy provides permanent life insurance coverage and guaranteed values while also participating in the insurer's participating account. Policyowner dividends may be credited to the policy, although dividends are not guaranteed.
For a corporation with long-term capital that is not required for normal business operations, participating whole life may provide a way to reposition some of that capital into an asset designed to provide permanent insurance protection, cash value and long-term estate value.
The important question is not simply whether participating whole life is a good product.
It is whether it is appropriate for this corporation, this business owner and this particular objective.
Excess Corporate Cash
Successful businesses can eventually accumulate more cash than they require for operating expenses, taxes, reserves and planned investments.
There are several potential uses for that capital.
The corporation might retain cash, reinvest in the business, purchase conventional investments, distribute money to the shareholder or use some of the capital to fund permanent life insurance.
Corporate-owned life insurance should not automatically replace those other choices.
Instead, we help business owners evaluate where permanent insurance may fit alongside them.
For an owner with a genuine permanent insurance need and a long time horizon, allocating a portion of excess corporate cash toward participating whole life can potentially create a very different long-term outcome from simply leaving the same money sitting in cash.
The Capital Dividend Account
The Capital Dividend Account, or CDA, is one reason corporate-owned life insurance can be particularly relevant in estate planning.
When an insured shareholder dies and the corporation receives life insurance proceeds, the death benefit less the policy's adjusted cost basis immediately before death can generally contribute to the corporation's CDA, subject to the applicable tax rules.
Capital dividends can generally be paid from the CDA to Canadian-resident shareholders without additional personal income tax.
The calculation and administration of the CDA need to be handled correctly, which is why accountants and tax professionals may become involved when implementing an estate strategy.
LifeSimple's role is to help business owners understand how the insurance works and how the potential CDA benefit fits into the overall insurance strategy.
Corporate Insured Retirement Strategies
Some business owners are also interested in using permanent life insurance as part of their longer-term retirement planning.
A Corporate Insured Retirement Plan, commonly referred to as a CIRP, generally involves building value inside a corporate-owned permanent life insurance policy and potentially using the policy as collateral for third-party borrowing later in life.
The borrowing component is important.
A CIRP does not simply turn a life insurance policy into guaranteed retirement income. Future lending depends on the lender, available collateral, policy values, interest rates and the financial circumstances at the time.
There can also be important tax considerations depending on whether the corporation or the individual is borrowing and how money ultimately moves from the corporation to the shareholder.
For the right business owner, an insured retirement strategy may be worth exploring. But it needs to be designed carefully and should not depend on unrealistic assumptions about future borrowing.
Immediate Financing Arrangements
An Immediate Financing Arrangement, or IFA, takes the financing concept in a different direction.
Instead of waiting until retirement to potentially borrow against a mature policy, an IFA generally involves funding a permanent insurance policy and arranging third-party financing relatively early in the strategy.
The objective can be to obtain the required permanent insurance coverage while allowing some of the capital committed to the strategy to be redeployed into the business or another qualifying use.
An IFA is not appropriate simply because a business owner can afford a large insurance premium.
The insurance need should stand on its own. Financing introduces additional considerations, including interest costs, lender requirements, collateral requirements and leverage.
For that reason, an IFA requires more analysis than simply illustrating a life insurance policy.
How Would Corporate Life Insurance Fit Into Your Plans?
Every corporation is different. Whether you're considering excess corporate cash, estate planning or long-term wealth preservation, the right approach depends on your business and your objectives.
We can help you explore whether corporate-owned life insurance is appropriate for your situation.
Book a 30-Minute Corporate Strategy Meeting
Prefer to email us directly? Send us your questions. No obligation.
Business Protection and Key Person Insurance
Not every corporate insurance conversation is about accumulating wealth.
Sometimes the immediate concern is protecting the business itself.
A company may depend heavily on an owner, executive, salesperson or other individual whose death could create a significant financial disruption.
Life insurance can potentially provide liquidity to help the corporation manage that risk.
Depending on the circumstances, insurance may also form part of shareholder, succession or buy-sell planning.
The appropriate solution depends on what financial loss the business is actually trying to protect against.
Access to Advanced Case Design
More sophisticated corporate insurance cases can involve significantly more analysis than a typical personal insurance application.
Depending on the strategy, this can include reviewing different permanent insurance designs, comparing insurers, examining projected cash values and death benefits, evaluating financing concepts and considering how the insurance interacts with the owner's broader objectives.
LifeSimple can access advanced insurance case-design resources for more complex situations.
Where appropriate, implementation can also involve coordination with the business owner's accountant, lawyer or other professional advisors.
We don't believe an insurance advisor should pretend to replace those professionals.
Our job is to understand the insurance strategy, explain it clearly, design appropriate insurance solutions and work with the other professionals involved when specialized tax, accounting or legal advice is required.
Access to Multiple Canadian Life Insurance Companies
Corporate insurance should not begin with a predetermined insurance company.
Different Canadian insurers offer different permanent insurance products, participating whole life designs, premium structures and policy characteristics.
LifeSimple works with multiple Canadian life insurance companies, allowing us to compare solutions rather than assuming one insurer or one product design is appropriate for every business owner.
For larger or more sophisticated cases, relatively small differences in policy design can become meaningful over decades.
The objective is not simply to find a policy.
It is to find a structure that makes sense for the client.
Education Before Recommendation
Corporate life insurance can involve large premiums and commitments that may last for decades.
Business owners should understand what they are implementing.
That includes understanding the guaranteed and non-guaranteed components of the policy, how cash value develops, what happens if premiums become difficult to maintain, how the death benefit works, how the CDA may apply and what additional risks exist when borrowing is incorporated into the strategy.
That is also why LifeSimple publishes detailed information about these strategies.
Our goal is not to make every business owner believe they need corporate life insurance.
It is to give business owners enough information to understand the opportunity, ask better questions and determine whether further analysis makes sense.
Sometimes the conclusion will be that permanent insurance fits extremely well.
Sometimes a different approach will make more sense.
Both are useful outcomes.
Building a Corporate Insurance Strategy
A corporate insurance strategy can potentially involve several different pieces:
- Corporate-owned participating whole life
- Permanent estate protection
- Excess corporate cash planning
- Capital Dividend Account considerations
- Key person and business protection
- Business succession planning
- Corporate insured retirement strategies
- Immediate Financing Arrangements
- Long-term access to policy cash value
- Estate and legacy planning
Not every business owner needs all of these.
In fact, most won't.
The objective is to identify the pieces that solve an actual problem and build the insurance around those needs.
When Does It Make Sense to Have a Conversation?
You don't need to have already decided that you want corporate life insurance.
A conversation may be worthwhile if you are incorporated and:
- Significant cash is accumulating inside your corporation
- You have a permanent life insurance need
- You are thinking about your estate or the eventual transfer of wealth
- You want to understand the Capital Dividend Account
- You are approaching retirement or planning an eventual business exit
- You are interested in using permanent insurance while maintaining access to capital
- You have heard about CIRPs or IFAs and want to understand how they actually work
- You want to compare corporate insurance with the other options available for your capital
The first step is simply determining whether there is enough of a fit to justify further analysis.
Explore a Corporate Insurance Strategy With LifeSimple
If you've been researching corporate-owned life insurance, you've probably realized there is much more to the strategy than purchasing a policy.
That's where we can help.
LifeSimple works with Canadian business owners to evaluate their insurance needs, understand the available strategies and design corporate-owned life insurance solutions around their actual objectives.
A 30-minute introductory meeting gives us an opportunity to learn about your corporation, the capital you're working with and what you're ultimately trying to accomplish.
From there, we can determine whether a corporate insurance strategy is worth exploring further.
Book a No-Pressure Corporate Life Insurance Strategy Meeting
Corporate-owned life insurance strategies can involve tax, accounting, legal and lending considerations. Information provided by LifeSimple is general in nature and should not be considered tax, accounting or legal advice. Appropriate professional advice should be obtained where required.
Related Guides
• Learn how Corporate Owned Life Insurance works
• Understanding the Capital Dividend Account (CDA)
• Learn about the CIRP Strategy
• How does an IFA work?