Key Person Insurance
Business owners and other key executives spend considerable time and
effort to acquire the knowledge, experience, judgement, reputation,
relationships and skills that make them valuable to the business. When they
die, the business loses a key member of the management team and this
can have a severe financial impact.
During the disruption that follows the death of a key player, lenders may cut
back credit, creditors may press for immediate payment, debtors may delay
making payments, employees and customers may lose confidence, and
competitors make take advantage of the situation. Larger corporations are
often in a much better position to prepare for key executive turnover
because of sheer size and numbers. For smaller businesses finding an
immediate replacement with the same qualifications as the deceased owner
or executive is much more difficult. In the absence of proper planning, the
very survival of the business may be affected by the death of a business
owner or a key executive.
The impact of this situation can be considerably reduced if the business
has purchased an insurance policy on the life of the owner and/or key
executive. If they die, the life insurance proceeds give the business working
capital to meet immediate cash needs and provide a source of funds for
finding, attracting, hiring and training a replacement for the deceased
executive, or to hire interim management.
Business Loan Protection
It can be difficult to obtain adequate debt financing for a small business.
Creditors will often require the business owner to personally guarantee a
loan. The death of the business owner or another key executive may cause
creditors to demand immediate repayment of outstanding business debts.
This can place a significant burden on the business and force the
liquidation of key business assets at fire sale prices at a time when
business results may already be severely impacted by the death. In
addition, if the business owner has personally guaranteed the debts
incurred by the business, the owner, or the owner's estate may be liable for
any outstanding debts that the business is unable to pay.
A solution is for the business to buy an insurance policy on the life of the
business owner(s) or other key executives. Proceeds from the life
insurance policy are tax-free and may be used to pay down the outstanding
business debt. A creditor may require a small business to purchase
collateral life insurance to protect the creditor's interests, particularly if the
death of the business owner could affect the value of business assets used
to secure the debt. In other cases, the business owner may simply want to
ensure that business debts will be fully repaid if he or she dies to minimize
financial risks for heirs and to permit the business to continue free of debt.
Generally, life insurance premiums paid for business loan protection are
not deductible for tax purposes. However, if a life insurance policy has been
collaterally assigned to a restricted financial institution, a portion of the
premiums may be deductible.
Buy-sell Funding
A key component of an integrated financial plan is planning for business
succession. An integral part of any succession plan is to ensure that
financing is in place to fund the purchase and sale of the business interest
if an owner dies. Life insurance is generally an efficient way to fund the
obligation that results from a buy-sell agreement when a shareholder or
partner dies. An important consideration is whether to fund the buy-sell
arrangement with corporate owned or personally owned life insurance.
Ensuring that the ownership is properly arranged from the onset will avoid a
transfer of ownership of the insurance policy in the future, which would
result in a disposition of the policy and could possibly trigger a tax liability.
Funding Capital Gains Tax on a Business at Death
An individual who owns shares in a corporation, a partnership interest, or
business assets (as in the case of a sole proprietorship) will be deemed to
have disposed of these properties at death. As a result a tax liability may
arise in the form of capital gains and recaptured capital cost allowance. If
funds or other assets are not available to pay the tax liability, the shares or
partnership interest may have to be sold, or business assets may have to
be liquidated, possibly for a price below the fair market value. Life
insurance can provide the funds needed to pay the tax liability that results
from the capital gains and recaptured depreciation triggered by an
individual's death. The individual could own the life insurance policy, or it
could be owned by the corporation or partnership and dispersed to the
individual's estate after death.
Split Dollar Life Insurance
Life insurance's versatility makes it an excellent choice for meeting a dual
need experienced by many small businesses. It's common for one party
within a business to need the financial protection that life insurance
provides against death, either their's or someone else's within the
company, while another person needs a tax-sheltered investment vehicle.
In these arrangements, one party typically owns and pays for a level death
benefit portion of the policy and the other party owns and funds the
remaining interests in the policy (generally the cash value).
Executive Compensation
Small business owners often offer supplementary benefit packages to
attract executives. These packages offer a wide assortment of benefits,
which may include life insurance protection. The policy may be purchased
by the business/employer, or it may be owned and funded jointly by the
employer and the executive. The executive's dependants would be named
as the beneficiary of all or a portion of the policy. The employer paid
portion of the life insurance premium must be reported as a taxable benefit
to the executive. It is important that the amount reported represents a
reasonable cost for the benefit received.
Wealth Creation
Often a business's profits or surplus cash are invested in GICs or taxable
investments. These taxable investments may not be the business's best
investment option. If the business already needs an exempt life insurance
policy for key-person insurance, business loan protection or some other
business insurance need, the policy could also be used as a vehicle for
investing the company's excess profits. An exempt, permanent life
insurance policy allows for tax-deferred growth of the cash value and
tax-free receipt of the proceeds at 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. Significant cash value can
accumulate on a tax-deferred basis if the business deposits the maximum
amount permitted by the Income Tax Act into the exempt policy. The
deposits can remain within the policy on a tax-sheltered basis and pay for
the cost of insurance and expenses in future years. If the corporation or
shareholder needs access to the cash, the policy's cash surrender value
can be accessed through withdrawals or a collateral loan secured against
the insurance policy.
Click here for additional information and clarifications.
Business owners and other key executives spend considerable time and
effort to acquire the knowledge, experience, judgement, reputation,
relationships and skills that make them valuable to the business. When they
die, the business loses a key member of the management team and this
can have a severe financial impact.
During the disruption that follows the death of a key player, lenders may cut
back credit, creditors may press for immediate payment, debtors may delay
making payments, employees and customers may lose confidence, and
competitors make take advantage of the situation. Larger corporations are
often in a much better position to prepare for key executive turnover
because of sheer size and numbers. For smaller businesses finding an
immediate replacement with the same qualifications as the deceased owner
or executive is much more difficult. In the absence of proper planning, the
very survival of the business may be affected by the death of a business
owner or a key executive.
The impact of this situation can be considerably reduced if the business
has purchased an insurance policy on the life of the owner and/or key
executive. If they die, the life insurance proceeds give the business working
capital to meet immediate cash needs and provide a source of funds for
finding, attracting, hiring and training a replacement for the deceased
executive, or to hire interim management.
Business Loan Protection
It can be difficult to obtain adequate debt financing for a small business.
Creditors will often require the business owner to personally guarantee a
loan. The death of the business owner or another key executive may cause
creditors to demand immediate repayment of outstanding business debts.
This can place a significant burden on the business and force the
liquidation of key business assets at fire sale prices at a time when
business results may already be severely impacted by the death. In
addition, if the business owner has personally guaranteed the debts
incurred by the business, the owner, or the owner's estate may be liable for
any outstanding debts that the business is unable to pay.
A solution is for the business to buy an insurance policy on the life of the
business owner(s) or other key executives. Proceeds from the life
insurance policy are tax-free and may be used to pay down the outstanding
business debt. A creditor may require a small business to purchase
collateral life insurance to protect the creditor's interests, particularly if the
death of the business owner could affect the value of business assets used
to secure the debt. In other cases, the business owner may simply want to
ensure that business debts will be fully repaid if he or she dies to minimize
financial risks for heirs and to permit the business to continue free of debt.
Generally, life insurance premiums paid for business loan protection are
not deductible for tax purposes. However, if a life insurance policy has been
collaterally assigned to a restricted financial institution, a portion of the
premiums may be deductible.
Buy-sell Funding
A key component of an integrated financial plan is planning for business
succession. An integral part of any succession plan is to ensure that
financing is in place to fund the purchase and sale of the business interest
if an owner dies. Life insurance is generally an efficient way to fund the
obligation that results from a buy-sell agreement when a shareholder or
partner dies. An important consideration is whether to fund the buy-sell
arrangement with corporate owned or personally owned life insurance.
Ensuring that the ownership is properly arranged from the onset will avoid a
transfer of ownership of the insurance policy in the future, which would
result in a disposition of the policy and could possibly trigger a tax liability.
Funding Capital Gains Tax on a Business at Death
An individual who owns shares in a corporation, a partnership interest, or
business assets (as in the case of a sole proprietorship) will be deemed to
have disposed of these properties at death. As a result a tax liability may
arise in the form of capital gains and recaptured capital cost allowance. If
funds or other assets are not available to pay the tax liability, the shares or
partnership interest may have to be sold, or business assets may have to
be liquidated, possibly for a price below the fair market value. Life
insurance can provide the funds needed to pay the tax liability that results
from the capital gains and recaptured depreciation triggered by an
individual's death. The individual could own the life insurance policy, or it
could be owned by the corporation or partnership and dispersed to the
individual's estate after death.
Split Dollar Life Insurance
Life insurance's versatility makes it an excellent choice for meeting a dual
need experienced by many small businesses. It's common for one party
within a business to need the financial protection that life insurance
provides against death, either their's or someone else's within the
company, while another person needs a tax-sheltered investment vehicle.
In these arrangements, one party typically owns and pays for a level death
benefit portion of the policy and the other party owns and funds the
remaining interests in the policy (generally the cash value).
Executive Compensation
Small business owners often offer supplementary benefit packages to
attract executives. These packages offer a wide assortment of benefits,
which may include life insurance protection. The policy may be purchased
by the business/employer, or it may be owned and funded jointly by the
employer and the executive. The executive's dependants would be named
as the beneficiary of all or a portion of the policy. The employer paid
portion of the life insurance premium must be reported as a taxable benefit
to the executive. It is important that the amount reported represents a
reasonable cost for the benefit received.
Wealth Creation
Often a business's profits or surplus cash are invested in GICs or taxable
investments. These taxable investments may not be the business's best
investment option. If the business already needs an exempt life insurance
policy for key-person insurance, business loan protection or some other
business insurance need, the policy could also be used as a vehicle for
investing the company's excess profits. An exempt, permanent life
insurance policy allows for tax-deferred growth of the cash value and
tax-free receipt of the proceeds at 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. Significant cash value can
accumulate on a tax-deferred basis if the business deposits the maximum
amount permitted by the Income Tax Act into the exempt policy. The
deposits can remain within the policy on a tax-sheltered basis and pay for
the cost of insurance and expenses in future years. If the corporation or
shareholder needs access to the cash, the policy's cash surrender value
can be accessed through withdrawals or a collateral loan secured against
the insurance policy.
Click here for additional information and clarifications.
Business
Insurance
Insurance
 |
| |
 |
| Always ask for the best! My recommendations are based on plans offered by the Top 5 Insurance Companies in Canada. |