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Corporate life insurance: A planning tool for each stage of your professional journey

January 24, 2023

Corporate life insurance: A planning tool for each stage of your professional journey

Synopsis
4 Minute Read

Corporate-owned life insurance can be an excellent business and wealth-planning tool throughout the entire professional journey. Term insurance is a great option to help newer practice owners to offset their risk at a reasonable price. Permanent insurance, on the other hand, can help to build the business and personal wealth through the growth, established, and retirement stages. The investment component within many permanent insurance policies can also help to minimize the tax exposure of the practice, the practice owner, and to beneficiaries upon the policyholder’s death.

Business Advisor, Professional Services

Life insurance is an often misunderstood and under-utilized business and estate planning tool. Corporate-owned life insurance can be useful at each stage of the professional lifecycle to help mitigate risk, as well as to preserve and increase family wealth. This article examines the types of corporate insurance options that are available and their value as your practice grows, and you mature.

Types of life insurance

You can choose from two types of life insurance: term and permanent.

Term insurance provides a fixed amount of coverage for a fixed amount of time. When the term expires, so does the coverage. Permanent insurance provides coverage for life ­— or, more appropriately, for as long as the premiums are paid.

Permanent insurance also differs from term insurance in that it includes both a coverage component and an investment component. The investment portion grows tax-free within the policy. When a death benefit is paid, the funds are paid to the corporation and disbursed to the shareholders in a tax-efficient manner.

Term insurance can be the lower-cost option of the two. However, policies must be renewed upon the conclusion of the term (which can range from annually to 20 years or more) and typically are more expensive with each renewal. While term insurance can provide benefits in the shorter term at a reasonable cost, the total costs and benefits — greater risk management, estate liquidity, and a means to preserve and increase wealth — tend to favour permanent insurance over the long term.

Coverages and benefits to consider throughout your career

Your insurance needs will evolve as you mature through the professional cycle. Just as you should be rebalancing your investment portfolio on a regular basis, the same is true for your insurance coverage. While it may not require as frequent attention, you should be considering insurance implications any time there is a material change to your health, wealth, or your personal and professional goals.

Foundational (new practice)

A few things are likely true if you’re in the early stages of your career as both a professional and a practice owner. For one, you are almost certainly carrying significant student debt and potentially some professional debt as well. You may also be looking to start a family and want to know they’ll be cared for in the event you experience an accident or sudden illness.

Term insurance can be an effective tool to mitigate your risk during these early stages. The lower cost of the policy offers a reasonable amount of coverage while keeping your expenses manageable — this can be a good fit at a time when cash flow and peace of mind are both at a premium. Provided there isn’t a material change in your medical history, many term policies also include an option to convert to permanent insurance when your budget allows.

You’ll also want to think about critical illness and disability insurance coverage to help manage your various risks and the impacts on your practice and family.

Reap the benefits of owning your practice

Owning insurance through your professional corporation or holding company allows you to use business funds to purchase coverage. Not only does this give you more buying power, but it also leaves more after-tax income in your pocket to focus on growing your family.

The foundational stage is a good time to revisit all insurance policies you own personally and whether it would be better to hold those policies within your professional corporation. There are a number of factors which need to be considered in this determination and your professional advisors can help you evaluate the options.

Growth

You don’t want to overburden yourself too early, but you will want to think about switching over to permanent insurance as soon as you’re financially able. Premiums are lower when you are younger and healthy. Plus, the sooner you can begin contributing to the insurance policy, the longer the investment returns will accrue tax-free within the policy.

As your practice grows, you also want to consider whether the insurance coverage you have is addressing your most vulnerable risks and liabilities. Changes to your health and well-being, having children, and investing in new real estate or technology, are just a few of the ways your personal and professional life might change during this stage.

Established

At some point, your focus will shift from growing your practice to ensuring it remains sustainable and profitable as you prepare for your retirement. Once again, it’s worth considering how your risks and the benefits you’re seeking from insurance have changed. For example, protecting your family’s wealth, positioning the business favourably to buyers, and leaving a well-capitalized estate to your loved ones.

The established stage of practice can cover a large portion of your career and it is by no means uniform. Your focus and goals will change significantly over these 10 to 15 years. Permanent insurance offers flexibility to help you bridge the transition through the growth to established stages, and eventually, the established stage into succession or retirement from your professional journey.

Disclaimer

There is an inherent risk in any leveraged strategy. Adequate knowledge and care are also necessary to ensure you and your corporation remain compliant with all applicable tax and legal requirements. Consult with your professional advisor before purchasing an insurance policy and undertaking any of the following opportunities.

Leveraged insurance (corporate borrowing): You can use corporate insurance as collateral for a corporate line of credit. You can take out a loan through your professional corporation to either make investments in the practice or pay dividends to shareholders. The interest may be deductible to the corporation.

With proper planning this loan would be repaid upon your death, using the tax-free insurance payout. The remaining proceeds would be available to the beneficiaries.

Leveraged insurance (personal borrowing): You can use corporate insurance as collateral for a personal line of credit. This would enable you to reduce the taxable dividends you need to withdraw from your professional corporation.

With proper planning, withdrawals against the line of credit would be repaid with the tax-free insurance payout. The remaining proceeds would be available to the beneficiaries. 

Tool to stay onside of the small business deduction: As a professional corporation accumulates more than $50,000 in passive investment income in a year the corporation will incur a reduction of its small business deduction (its access to lower rates of corporate tax). When the investment income earned by the corporation is greater than $150,000, the full small business deduction limit will be eliminated. Investing within a permanent life insurance policy can help to mitigate this passive investment grind on the small business deduction limit.

Investment income earned within the policy grows tax-free, thereby preventing the loss of your small business deduction which will also increase your overall wealth.

Philanthropy: You can leverage permanent insurance as a legacy tool to help lower your overall estate tax liability while being able to make a charitable gift. The payout from the policy is tax-free, which will help to maximize your philanthropic legacy and the benefit to causes close to your heart.

A powerful tool if wielded correctly

Corporate-owned insurance can be a useful tool to help you achieve your personal and professional goals at every stage of your career. It offers critical peace of mind that your legacy will continue after you pass, and your loved ones will be cared for. Just as importantly, it can also help you grow your practice, build your personal wealth, and protect it well into retirement.

Like any investment, the benefits of corporate-owned insurance compound over time, so the sooner you can begin the better. However, this is not a tool you can simply invest in at the outset of your career and forget about. It requires careful and continuous planning to ensure you pair the appropriate coverage with the relevant wealth and risk-planning strategies at each point in your professional journey.

Your professional advisors can help you choose the appropriate type of insurance, how much coverage to buy, and how to involve your corporation. They can also recommend other synergistic opportunities to protect your bottom line and maximize your opportunities in the years to come.

Contact us

To learn more about how MNP can help your organization, contact Joey Ingram, CPA, CA.

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