Corporate Owned Life Insurance

This decision requires analyzing the pros and cons of each type of ownership in order to make an informed decision. The premiums for corporate owned life insurance policies are not tax deductible, there are some exceptions. A Stone-Hedge Financial Group Inc. insurance advisor will assist you with this decision. Regardless of the ownership of the policy, personal or corporate there will be trade-offs that you will have to make.

The biggest advantage of corporate-owned life insurance is the premiums paid with corporate after-tax dollars are taxed at a much lower tax rate than the individual shareholder’s personal tax rate. The corporate tax rate applicable to the lower level of active business income in Ontario is approximately 15%, this rate changes annually. The top individual marginal tax rate in Ontario is approximately 46%, this rate changes annually. The biggest disadvantage of corporate-owned life insurance is the loss of protection from creditors.

In Ontario when an individual owns their life insurance policy personally and names a beneficiary within a prescribed class, the policy is exempt from seizure by creditors. Corporate-owned life insurance does not provide protection from creditors. Corporations also have a broader range of creditors than an individual. To mitigate the risk of exposing a life insurance policy from seizure by creditors, consider corporate ownership in a holding company.

To avoid taxation of cash values in a corporate owned life insurance policy a split dollar arrangement can be set up. The corporation pays the premiums for the pure cost of insurance and the insured pays the premiums for the cash value of the policy personally.

Corporate vs. Personally-Owned Life Insurance

To determine which type of ownership would be most beneficial for your circumstances the following considerations need to be taken into account: 

1. What is the purpose of the life insurance?

2. Who will require the death benefit and cash surrender value of the policy, the corporation or you personally?

3. Do you intend to transfer the policy to yourself personally (change ownership) in the future?

4. Who has the financial capacity to pay the policy premiums the corporation or the individual?

5. Is creditor protection important?

6. What are the tax implications of corporate versus personal ownership of the life insurance policy?

Personal ownership

Advantages: 

1. The policy is creditor protected when a beneficiary within a prescribed class is named.

2. Any beneficiary can be named including religious organizations, charities, friends, relatives or any combination thereof.

3. The cash surrender value will not affect the enhanced capital gains exemption.

4. Personal access to the policy cash value can be accessed with ease. In most cases the cash value is taxed at a lower tax rate than accessing the proceeds from a corporately owned policy. 

Disadvantages:

1. More pre-tax dollars may be required to pay the premium if the personal tax rate is higher than the corporate tax rate.

Corporate ownership (operating company)

Advantages:

1. Ease of administration when multiple policies are required.

2. Fewer pre-tax dollars are required to pay the premium if the corporate tax rate is lower than the personal tax rate.

3. All or part of the premium can be deductible for tax purposes if the policy is required to be assigned as collateral for a loan and the loan interest is deductible as a business expense for tax purposes.

4. The death benefit less any adjusted cost base can flow through the corporation’s notional capital dividend account. The proceeds of the capital dividend can be paid out tax-free by the remaining shareholders or the shareholder’s estate.

Disadvantages: 

2. No protection from corporate creditors. 

3. The corporation is the only beneficiary of the policy. This is required to avoid taxable shareholder benefits.

4. Cash surrender value could affect the qualified small business corporation status for purposes of the enhanced capital gains tax exemption. This is a consideration when purchasing a policy in an operating company.

5. Policy gains and taxable income can arise on future transfers of ownership of the policy.

If creditor protection is not important to you and the corporation is a qualified small business corporation with active business income, then purchasing a life insurance policy in a corporation has the advantage of requiring less corporate after tax dollars than personal after tax dollars. Prior to purchasing a corporate owned policy we would advise clients to seek independent legal and accounting advice. There are many other factors that need to be considered that are beyond the scope of services provided by insurance brokers.

Contact Us for a Corporate Life Insurance Quote

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.