Corporate Owned Life Insurance
Many people who own life insurance also own incorporated businesses. Who should own the insurance, the person or the business?
It is not always an easy choice.
Things that favour personal ownership:
- There are many shareholders in the business and the person needs insurance for family purposes
- The business could be sold and the insurance would still be required by the family
- The insurance cash values could harm the ability of the corporation to qualify for the capital gain exemption
Things that favour corporate ownership
- A creditor wants it. Some of the insurance cost could be tax deductible.
- The corporation can use low tax rate earnings to pay for it. Life insurance premiums are not deductible in most cases. If the corporation is paying tax at 15%, it is keeping 85 cents of each dollar. If it pays the premium, it must earn $10,000 to pay $8,500. The shareholder on the other hand, Taxed at 43% for example would need to earn $14,912 to do so. Assuming the money the shareholder earns comes from the corporation, it would need to earn a little over $15,000 before income taxes and Employer Health Tax. The corporation ends up with 85% of roughly $5,000 as its win. Other things being equal, as long as the corporation has active business income, it always makes money by owning at the corporate level.
The insurance gain on death passes out of the corporation with tax to no one, so no downside there.
Insurance proceeds do not affect the share value for capital gain purposes, but might increase the probate value of the estate.
The corporation has more wealth because of the tax saving.
Corporate owned can let you buy more coverage or better quality.
Life insurance in a corporation is usually straight forward. Disability insurance is a little more complicated and more atrithmetic is required to make the decision. Critical illness insurance is also more complex.
Be careful with return of premium options on disability insurance and critical illness insurance.
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