How Insurance Provides Security – and Opportunity – for your Business
December 1, 2017 | Updated October 25, 2018
Your life, your family and your business deserve protection and if you’re a business owner, insurance can provide that security in a number of ways that may surprise you. It can also provide opportunity to help build assets – and your business – in a tax-effective way for your retirement or estate plan.
The Purchase of Shares
If you have one or more shareholders in your business, consider insurance when it comes to your Shareholders’ Agreement. In the event of the death or disability of a shareholder, having insurance on their life means immediate funding will be available to purchase the shares of the deceased shareholder and allow for a smooth transition that allows the business to continue to thrive. This method is a more cost-effective and convenient way to fund a buy/sell than borrowing money, liquidating assets, creating cash reserves, or using after-tax corporate profits. Without the funding, the deceased’s spouse or child could end up becoming a shareholder – an outcome which may not be desirable for all parties involved.
A note about taxes: the life insurance benefit is received tax free by the corporation on the death of the shareholder and generates a credit to the Capital Dividend Account (CDA). The CDA can in turn be paid tax free to the estate of the shareholder. The CDA is a valuable tool that can be used in post-mortem planning to remove potential double tax on the death of the shareholder.
Collateral for a Business Loan
If you have a need for a loan to grow your business, your life insurance policy can help put you in the right position. Lenders (banks and other financial institutions that lend money to small businesses) often ask a borrower to provide life insurance on the lives of the key shareholders or employees as a condition of lending. This means that your insurance policy will not only protect you, your family members, your corporation, and key persons to the business – it can also help enhance cash flow to your business.
Here are a few other options to think about:
Key Person Insurance - common with small to medium businesses; this protects your business if you have one or more key people (e.g., you, another shareholder, a hired executive) whose death, disability or critical illness would harm the financial health of the business
Charitable Giving - corporate-owned insurance can be used as a tool to donate to charity: assign the policy ownership to the charity, use the policy to fund an estate gift, or use it to fund corporate gifting
Estate Protection - insurance can be used to pay taxes due upon death thereby protecting the value of your estate which provides a tax-efficient way to enhance or create your estate
Estate Equalization - it is common with family businesses that not all of the children want to, or are suited to, work in the business and the parents want all children to be dealt with fairly; life insurance can provide liquidity to achieve this fairness