Corporate Life Insurance
Over time, the awareness and importance of having a life insurance has been rapidly increasing. You, as an individual can either have a corporate life insurance policy or a personal life insurance policy. Both have their specific pros and cons, but as a matter of fact, the advantages of putting in your life insurance within the company are extremely high. In the case of a shareholder’s death, you can even avail capital and a protection against your assets if insured.
A few important points are to be considered before determining whether a person should own life insurance or not. The primary point that needs consideration is the purpose of taking up the life insurance. In case the purpose is corporately related to covering a business loan, funding a buy/sell agreement, or a key person’s protection, the company can own the policy of the insurance. But for personal purposes like providing money to the family after your death, an individual can opt for a personal insurance. Another point that is to be kept in mind is when and where the amount generated from insurance would be needed.
It can either be needed by the company or by your estate or even by some other beneficiary. Thus, these particular points would help you determine the fact that who should actually be the owner and payer of the life insurance policy.
The benefit of the corporation owning the life insurance lays in the manner it is being taxed. Its tax determination would ensure the benefit of owning a corporate life insurance policy. This is because, in Canada, the tax to be paid by corporations is less than that to be paid by the individuals. The savings arise when the premium is paid from the after-tax earnings of the corporate rather than the personal after-tax earnings.
Explanation Through an Illustration
Let’s assume that Mr. Smith is an ordinary individual who took a business loan and is considering taking a life insurance policy to cover the same in case he dies. Mr. Smith is under the confusion that whether it would be better if his corporation would own the insurance at 30% tax rate and pay the premium of $1000 or he should pay it individually at a tax rate of 50%.
In this scenario, there are two possible outcomes. If the premium is paid personally by Mr. Smith, he’ll have to pay $1000 per month for which he needs to earn $2000 monthly. Whereas, if Mr. Smith’s corporation pays the premium, a total sum of $1429 is to be earned to pay $1000 monthly.
Therefore, Mr. Smith has a huge advantage when the policy is being taken through the corporation and not personally. In case of his demise, the insurance amount would still be paid to the corporation without any taxation as it was made beneficiary by Mr. Smith. A major part of the insurance benefits would be transferred to CDA which stands for Capital Dividend Account. This amount can be given to shareholders to cover any necessary expenses without any taxation.
A corporate life insurance policy can prove to be extremely beneficial for you in terms of business and real-estate planning. It's clearly not meant for everyone, but for those who could use it, can drag out amazing benefits from it.