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Gabriel Lalonde
November 20, 2020

Corporate-Owned Life Insurance: Accumulate Passive Wealth and Transfer Out Tax-Free

Canadian business owners have different financial planning needs than employees who work for a company. In addition to financial obligations like cash flow management, payroll needs, equipment costs, overhead and a slew of other expenses, business owners also need to think about unique life insurance strategies. The good news is, you can accumulate passive wealth and enjoy tax-free benefits with corporate-owned life insurance.

What is corporate-owned life insurance?

This type of insurance is very similar to individual life insurance, but instead of an individual like you or me purchasing the policy, corporate-owned life insurance is purchased, owned and paid for by a company.

Why is this a good financial strategy for Canadian business owners? Because corporate-owned life insurance helps protect a business – and possibly keep it running – upon death of an owner. Proceeds from the insurance policy can be used for a variety of business needs such as paying off debt the corporation owes and providing capital for operating costs.

Similar to the life insurance policies we’re all used to for individuals, corporate-owned life insurance can be purchased as whole life, universal life or term life insurance.

What is passive wealth?

Passive wealth is money that accumulates and grows without actively being managed i.e. you don’t need to buy and sell assets to make a profit. Income investing is an example of passive wealth. You invest an initial amount of money and it provides income on a regular basis without having to touch your initial investment. The income can be reinvested and added onto the initial investment amount and with the next distribution you’ll receive income on the new, larger amount (your initial investment plus the reinvested income). That’s the beauty of passive wealth.

If you choose to purchase a universal life or whole life corporate-owned insurance policy, you can choose to have an investment aspect within the policy. The investment part of an insurance policy reinvests money back into the insurance benefit amount. This additional money grows tax-free over the years and can increase the amount of the insurance benefit payout upon death.

How do business owners benefit from tax-free transfer out strategies?

There are four major advantages when purchasing a corporate-owned life insurance policy:

  1. Like most insurance proceeds in Canada, the payout benefits are transferred to the estate tax-free upon death.
  2. Business owners can help lower their tax bill by adding a portion of profits into the investment aspect of the insurance policy. Investments will grow tax-free year after year.
  3. Upon death, the amount of the life insurance benefit is valued at the cash surrender value. All of the investment portion that’s been growing tax-free over the years is also paid out without any additional tax implications upon death.
  4. You can access the Cash Surrender Value (CSV) of your life insurance policy prior to death with an Immediate Financing Arrangement (IFA) or Corporate Insured Retirement Plan. These financial strategies allow you to use the CSV of your life insurance policy as collateral to secure financing for your business.

Why business owners need corporate life insurance?

If you have a surplus of cash or profits in your business, the initial thought may be to invest the money and let it growth with passive income as you accumulate wealth. But, in most cases these will be non-registered investments and therefore taxable as you receive income.

A better option is to invest your excess cash tax-free in a corporate life insurance policy. The money grows tax-free as long as it’s in the policy and the increased value is paid out tax-free upon death. If you want to invest for the long-term, it’s a great financial planning strategy and if you ever need access to the money in your CSV, you can do so with an IFA or Corporate Insured Retirement Plan.

If you own or are a partner in a company, let’s talk about creating tax-efficient wealth with corporate-owned life insurance. Many business owners think they don’t need life insurance to protect their business against potential losses because they have a positive net worth a.k.a. personal assets. This is a big misconception. Contact us to discuss how we can help you accumulate passive wealth and offer tax-free transfer out strategies for your business.

Gab

About Gabriel Lalonde, CFEI

When Gabriel is not crunching numbers, you can find him accompanied by his beautiful wife Ana and son Théo, either on the golf course in the summer or the ski slopes in the winter. His dream has always been to take over the family business as he saw first hand how much impact his father had on shaping peoples lives and creating long lasting legacies. Gabriel has a true passion for financial literacy and he believes everyone should have access to solid financial education.

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