Why Life Insurance is Important for Business Owners
If you’ve seen some of our other content you know we specialize in life insurance strategies for Business Owners and High Income Incorporated Professionals.
Today we’re going to be talking about Business Owners and how life insurance can play a crucial part in their financial plan.
Specifically we’re going to be covering the benefits of key person insurance for your business, why you might be required to have life insurance, and the tax advantages life insurance provides a business.
Key Person Insurance
First up is Key Person insurance. Key person insurance provides coverage should anything happen to a business owner or a key person in the company
This could be the owner, the partners or somebody that's very important to the company and very difficult to replace.
Maybe it's your top salesperson, your CEO, or it's someone who if they aren’t there your company's probably going to suffer.
It's probably not going to be someone who is easy to replace, you're not just going to put an ad out on indeed and have qualified candidates next week to replace this person.
If something happens to one of the partners or to someone very important to the company it's really good to have insurance on them because then at least there is an insurance payout that'll give you some money to stabilize the company because that person is not there anymore and potentially to go find a replacement.
That's why you would want to have insurance on key people in the company especially if they're crucial to the company's success
If you have shareholders, partners or some sort of multiple owner situation you would want key person insurance on the other people.
For example if your in partnership with Jack, you want insurance on Jack so that if something happens to him the money would pay out to the company, and you would be able to buy out his shares.
What would probably happen is Jack’s shares in the company would go to his estate and then they would go to whoever is the beneficiary of that estate.
It could be his wife, his husband, his kids, or whoever.
You don't necessarily want to be in business with those people, your in business with Jack.
So by having this insurance in place, and we would set up the insurance using some sort of valuation amount for the company, so that if Jack passes the insurance amount would pay out to the company. Then the company would use that to buy out the shares from Jack's estate or Jack’s beneficiaries.
That's really the big reasons why you would want to have insurance on key people and especially owners, partners, or more important shareholders of the company.
Someone might make you get Life Insurance
Another reason that you might have you might have the insurance company is somebody might make you get the insurance.
Maybe you're buying a building and you're borrowing millions of dollars from the bank.
The bank might say yeah here's the millions of dollars, but we need insurance on you because if you get hit by a bus tomorrow we need to make sure we get covered.
The bank might just tell you to get insurance and it might be part of your deal.
It also doesn't have to be a bank, for example say you're the developer of the building and whoever you're building it for wants to make sure that if something happens to you that there's money to keep things afloat while they look to replace you.
It doesn't have to be just a bank it could be some important project, or important deal that you're very important to somebody and they would need insurance on you because if your not there there's a big problem.
Tax Advantages of Life Insurance
The last part of why life insurance is important for business owners is the tax advantages that help you build and store wealth.
When business owners hold insurance inside their company they usually purchase permanent insurance, either whole life insurance or universal life insurance.
Which is different from the term insurance, which only provides coverage for a set period of time.
Whole life insurance and universal life insurance lasts your entire life. It has a lot of additional advantages, including storing money from your company inside the policy.
Now why would you want to do that if you've got cash in the company?
Say you've been a successful business owner and you've got to retained earnings and you're storing up money inside the company and potentially even flowing that to a holding company.
You've got this money inside the corporation, so what do you do with it?
Most business owners want to generate some sort of return, the problem is that there are no tax advantages, there's no tax advantage accounts for businesses.
Businesses don't have RRSPs, TFSAs, or a primary residence capital gains exemption.
Whatever outside investments business do would be taxed at the highest capital gains rate if it's capital gains, or the highest tax rate like your income is.
Life insurance is tax exempt and the growth within the life insurance policy is tax deferred.
So you could put that money inside a life insurance policy which is gonna grow through a dividend paid by the insurance company.
Right now the various different companies that we work with in Canada and they're paying anywhere from 5 to 6% of what's called a dividend scale interest rate.
This is very conservatively invested money, like you would expect from an insurance company.
How safe & secure is the money invested in insurance companies
How safe and secure is it? Well safe and secure enough for a bank to lend you 100%, 90%, or 80% loan to value of whatever cash is inside that policy.
Say you've put hundreds of thousands or millions of dollars inside this policy which is now growing in a tax deferred way from the growth of the cash from insurance company and from the dividend that it's paying.
You were able to then also take that across the street to a bank leverage it at 100% normal value against the cash.
You've got the insurance that you need, it's growing, and you can leverage it to run to do whatever you want.
You could also borrow the money to invest in the stock market , real estate, you can invest in other people's companies, or you could invest in more infrastructure for your company or whatever it is you do or maybe you're starting something else so you invest it in your next project.
It's a way to store the money that you have in your corporation and earn a return, It's a way to grow that money, it's a way to keep the money liquid through the leverage where you can use it when you need.
Then at the end of the day because it's life insurance one day it's gonna pay out when you're not here anymore.
That money's gonna pay to the corporation and the money that pays from a life insurance policy to the corporation in Canada pays out tax free, so the entire amount is going to pay out tax free and it creates what's called the capital dividend account or a CDA.
Then that money from the CDA can pay out to whoever the beneficiaries of that corporation are tax free.
So there are definitely some strong reasons to have life insurance that's properly structured inside your company.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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