Life insurance for businesses

A strategic tool that has proved its worth

Over the years, the financial services industry has established several strategies and concepts using life insurance for businesses.

Contrary to popular belief, insurance not only provides coverage but can also be an integral part of your financial planning and allow you to establish several capital accumulation strategies.

Most of the time, the only reason a business does not use insurance is that it has not been adequately informed of the benefits such a product can provide to both the business and its shareholders. By choosing a life-insurance strategy, you can take advantage of proven solutions that are already benefiting thousands of business people across the country.

While not everyone needs life insurance, it is surprising to see how many people do not have enough information about life insurance to make an informed decision.

How can life insurance be used by a business?

Life insurance can be an effective way to fund the tax liability payable at the time of death

Many people are unfamiliar with the usefulness of life insurance as a means of transferring family wealth to the next generation.

A business owner will be deemed to have disposed of these properties at the time of death. As a result, a tax liability may arise in the form of a capital gain and recaptured capital cost allowance. In some cases, the funds available may not be sufficient to pay the tax liability that arises due to a death and the shares or partnership interest may have to be sold, or business assets may have to be liquidated, possibly at a price below the fair market value in order to pay the taxes owing.

When used properly, life insurance can provide the funds needed to pay the tax liability that that arises at the time of death. Life insurance is a particularly valuable funding vehicle if the beneficiaries want to retain the fair market value of the estate.. The life insurance policy could be owned by the corporation and distributed to your estate after you die. Thus it makes this product ideal for intergenerational wealth transfer.

A solution tax-advantaged investment

If a business needs life insurance coverage in the event of a partner buy-out, the policy could also be used as a vehicle for investing the company’s profits. This is where an investment opportunity comes up.

An exempt, permanent life insurance policy allows for tax deferred growth of the cash value and tax-free receipt of the proceeds upon death. The cash value growth within an exempt policy is not subject to annual accrual taxation and is only subject to tax if there is a disposition of the policy (similar to an RRSP).

Significant cash value can accumulate on a tax-deferred basis if the business deposits the maximum amount permitted under the Income Tax Act. In addition to tax-sheltered investment opportunities, life-insurance policy proceeds as well as any accumulated assets are distributed to beneficiaries tax-free. Therefore, this feature makes tax-exempt life insurance ideal for estate planning.

In addition to tax-sheltered investing, proceeds from the policy, including any accumulated assets, are finally distributed directly to beneficiaries tax-free.  Therefore, this feature makes tax-exempt life insurance ideal for estate planning. 

Quite often, the only reason this product is missing from a financial plan is that many peoples are unaware of the benefits of ‘’tax exempt life insurance’’.

A solution for estate equalization

Life insurance can be used to equalize the transfer of assets among beneficiaries. An owner of a family business worth $6 million may wish to have his son take over the family business without disinheriting his daughter who has no interest in the business.

Transferring the company shares to the one child can create serious family conflict if the other family members receive bequests worth significantly less. Alternatively, dividing the shares of the family company equally among all family members when only one family member is actively involved in the business can also create family conflicts.

Estate equalization is designed to create a lump sum of capital to equalize the value of bequests made by an estate to the beneficiaries, while ensuring that the company shares go to the right person. The amount of life insurance required is determined based on the value of specific assets that cannot be divided equally amongst the beneficiaries.

Life insurance’s versatility makes it an excellent choice for meeting many needs of a business. It’s common for one party within a business to need the financial protection that life insurance provide against death, while another person needs a tax-sheltered investment vehicle.

New planning strategies should be developed, new tools should be discovered, and there should be new ways of getting things done.

When you choose a life-insurance strategy, you are taking advantage of proven solutions currently benefiting thousands of peoples across the country.

Life insurance can provide a cost-effective solution for the many situations that a business could face, such as the death of an owner.

How can life insurance be used to help a business?

• Coverage for a key individual
• Loan protection
• Partner buy-back agreement
• Funding capital for the payment of taxes due at the time of death
• Creation of shared ownership

Life insurance can also provide a business with an opportunity for tax-advantaged investing and can be used as part of an enticing compensation package to attract and retain the best employees.