Purchasing corporate insurance is a valuable decision, something that will impact your business welfares in both the short term and long term. It is critical for every business to consider purchasing corporate insurance to protect it from operational risks such as theft, losses, employee health, and unforeseen accidents.
As a whole, life insurance, at least in the corporate sense, isn’t supposed to be seen as an expense but rather as an investment that will not only benefit you but also save you from a lot of hassles and overhead nuisances in the coming future. It is a valuable asset and is considered such during appropriate circumstances – it will protect your well-being.
Suppose the primary decision maker or owner of the company dies. In that case, it’s challenging to replace, and sometimes, it might take months or even years to actually find someone and bring the business back to the original growth. The company may also be in loss and debt.
One of the benefits of having corporate life insurance is the protection it gets during such circumstances. The company will be protected with the required cash-flow to stock up some working capital, repay debts, or provide the funds necessary to hire and train a replacement when a key executive dies.
Not all corporate insurances are created equal, and thus there are still some caveats to be considered before you purchase one for your business. Here are four things you should be looking for in a worthy policy.
Ensure you perform thorough research and contemplate all the pros and cons to decide on the proper beneficiary! The reason is so that the corporation will be owning this policy (asset), and you will be using corporate dollars to fund this “asset”; if you designate yourself or your spouse as the beneficiary, then the Canada Revenue Agency (CRA) would assess a taxable shareholder benefit, which is not at all a good thing!
What is a taxable shareholder benefit? It is essentially a fair market value benefit assessed from using a corporate-owned asset for personal use without paying for the benefit.
Generally, if a corporation grants a benefit, such as the use of property, to a shareholder, it’s considered a taxable benefit.
2. Creditor Protection
Corporate-owned insurance can attain multiple objectives for your business, but it can also leave your policy prone and vulnerable to the company’s creditors. To minimize this risk and prevent your policy – additional planning is required.Creditors cannot touch corporate savings inside the corporation insurance policy. It’s a great way to protect your company’s assets from its creditors.
This strategic planning includes having another company own the policy while the current operating company is designated as the beneficiary. This method is not applicable for all businesses, and adding a complicated structure might not be suitable for your circumstances.If you’re looking for similar benefits while avoiding the above complex structure, your personally owned life insurance will inherently provide you with the creditor protection you seek.
3. Secure Planning
Purchasing corporate-owned life insurance could be a complicated process. It is highly advisable to seek professional help from an experienced advisor. Working with one will provide you with the knowledge and expertise essential to formulate your plan of action properly.
Your advisor will be able to help you make informed and accurate decisions on multiple questions such as:
- Does my shareholder agreement accurately reflect the implemented insurance strategy?
- How can I leverage the policy to create tax-free income during my retirement?
- Will corporate-owned insurance affect my ability to claim the qualified small business corporation exemption?
- Upon death, will the funds flow appropriately to achieve my estate planning objectives?
4. Scrutinize the Risk
One of the most valuable findings for your business insurance is first scrutinizing the number of risks thats are involved if things don’t go according to plan. Before you settle on a policy, make sure to examine the strategy and plan for the unforeseen future thoroughly.
After examining the risks from every point of view, if you conclude that the risks are tolerable, then by all means – go ahead with it. Regardless, if the risks are too much to handle and could cause you and your business some severe damage, then there is no point in taking further steps. A professional advisor is someone you should reach out to analyze the policy properly.
Also, assess the type of coverage (total or partial) the company will provide you at the time of claim settlement. The premiums you will pay depend solely upon your deductibles – the lower your deductibles, the higher your premiums will get. Most insurance companies will offer you a policy price after analyzing all the risks involved. Of course, what you are looking for is maximum coverage within a minimum cost.
These are some of the most important questions that you need to understand and apply; having an experienced advisor on your side makes it so much easier. Your perspective will shift from taking minute steps to the overall big picture.
The Big Picture
Knowing the end goal and having the vision to see the overall big picture is mandatory. When it comes to corporate life insurance, it’s important to know and consider the corporation’s plans. If at a point, there are possibilities that the corporation could be sold in the coming future, then keep in mind. When the policy is transferred to a shareholder from the corporation, a disposition will occur, resulting in a corporation’s tax liability.
Purchasing life insurance as a corporation will also benefit you in other ways – it will protect your assets and save taxes. These are some of the most important aspects to be considered before purchasing corporate insurance. Having a checklist to strike-off will help you to access the most suitable policy for your business.