Private corporations (CCPCs) can benefit from life insurance in various ways.

Business Uses

Buy/Sell Funding

• to fund the purchase of the shares of a deceased shareholder by the corporation or surviving shareholders according to the terms of a buy/sell agreement

Key-Person Insurance

• upon the disability, retirement or death of a key employee
  • to fund the hiring and training of new employees
  • to provide the corporation with a financial cushion
• the employer owns the policy, pays the premiums and is the beneficiary
• coverage might be one or more of the following
  • a multiple of salary
  • reduction in the value of the corporation
  • replacement of the corporate revenue lost
    • e.g., to replace $200,000/yr, invest $4,000,000 at 5%

• NOTE: life insurance creates a valuable Capital Dividend Account Credit

Collateral Insurance

• lenders often require the corporation to secure loans with corporate-owned insurance on the lives of shareholders
• a portion of the insurance premium is tax deductible (the lesser of the premiums paid and the Net Cost of Pure Insurance (NCPI))
• NOTE: the borrower must be the policyowner

Charitable Giving

• charitable contributions are deductible to the corporation, within limits
• the unused deductions can be carried forward to offset future income
• the surviving shareholders get a valuable CDA Credit
• alternative: the deceased can charitable contributions through the will —> tax credit of the year of death and possibly the preceding year

Tax Uses

There are many tax uses of life insurance.

Advantages

Less Expensive

Life insurance premiums are paid with aftertax dollars. A corporation with income below the Small Business Limit has a much lower tax rate than a shareholder. For example, a $1,000 premium costs

• corporation (taxed at 18.62%) : $1,229
• shareholder (taxed at 46.41%): $1,866

More Flexibility

For example, when funding a shareholders' agreement, the death benefits which the corporation receives can be used by

• the corporation to redeem the shares of the deceased
• the surviving shareholders to purchase the shares

More Cash Available

The corporation often has more cash available. For example, retired business owners can have money in a holding company

Preference

Not surprisingly, shareholders usually prefer to spend corporate dollars.

Drawbacks

Attacks By Creditors

When insurance proceeds are received by the corporation, they are subject to claims from the creditors of the corporation. Having the insurance owned by a holding company provides protection against claims from creditors of the operating company. Using a holding company also makes sale of the operating company easier since transferring an insurance policy out of a corporation is complicated.

Links

• Protect your business with key person insurance (The Globe and Mail, Jun 2012)