Vassalo & Associates Private Wealth Management, Summer 2024

But wait, there’s more: businesses uses for life insurance

Once you’re financially self-sufficient, and you don’t technically need the protection that life insurance offers, is there still a place for it?

Not only is there simply a place for insurance when you could self-insure, there are several potential uses for insurance beyond the protection stage. While term life insurance provides temporary protection, permanent life insurance policies provide lifetime protection and may also build cash values. These added features make these policies much more versatile and powerful financial planning tools.

In part I of this article, we explored some of the many personal uses for permanent life insurance that go beyond the traditional protection mindset. In part II, we’ll look at some ways life insurance can be of benefit to corporations.

Financial planners who do not discuss the many uses for life insurance are doing clients a disservice.

The insurance discussion is part and parcel of intelligent financial planning making the most of the tools at one’s disposal to maximize financial success.

Providing key person protection

Bringing us back to that “What if?” protection scenario, losing a key employee or owner is likely to have a significant negative impact on a business. The impacts may include time and costs to find a replacement, the potential for creditors to pull financing, or even the loss of clients. Business-owned insurance can provide a supplementary cash flow to help the business cover those costs.

Funding a buy-sell agreement

To be effective, a buy-sell agreement between multiple business owners needs to be affordably funded. Insurance purchased for each business owner can provide the company or surviving owners with the funds to buy out a deceased’s business interest.

Leveraging the policy for a business loan

Just as permanent insurance cash values may be used as a tax-efficient source of income for individuals, they may also be used to by a business. Using the cash value of the policy as collateral for a loan from a financial institution is often referred to as “leveraging.” Again, under current tax laws, the loan proceeds can be received tax free. If the loan proceeds are used to generate income from business or property, loan interest may be deductible. Where the policy is assigned to the financial institution as a condition of the loan, a portion of the insurance costs may be deductible. 

The loan agreement with the financial institution will provide the conditions for the loan repayment. In some cases, the borrower may have to make interest or capital payments on the outstanding balance. There are other risks associated with leveraging that also need to be considered.

A way to tax-effectively transfer assets from a corporation

As we’ve seen, on the personal side, a strategic reallocation to permanent insurance can be an efficient way to enhance estate values. The impact can be even more dramatic if the insurance is held in a private corporation since businesses can structure the arrangement so that the corporation may post the death benefit to its corporate dividend account (less an amount equal to the policy’s adjusted cost basis). An amount equal to the capital dividend account can then be paid out of the corporation as a tax-free capital dividend to shareholders.

Hopefully this brief overview of some of the many uses for life insurance has provided you with a glimpse into just how versatile and powerful a tool life insurance can be when structured appropriately. This overview, of course, is no substitute for independent professional advice. The concepts involve many important matters that must be considered including insurability, funding, structure, ownership and taxation. It is important to obtain personalized advice when dealing with insurance. Speak with your advisor for a full and complete review of your situation before making any decisions.

Teresa Schnurr BA, B Ed, CFP®, Investors Group Financial Services Inc. 

With an affinity for financials and a desire to make a difference, Teresa appreciates the opportunity to use her background and skills to empower others.  Teresa has been engaged in the financial services industry for over 25 years and with Vassalo & Associates Private Wealth Management since 2019.  As practice manager, Teresa’s focus is on strategy development and implementation, best practices, team development, marketing and client services.  Teresa is a University of Waterloo graduate and holds a BEd from the University of Toronto and a Teacher/Trainer of Adults certificate from Humber College.  She holds the CERTIFIED FINANCIAL PLANNER® designation.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Teresa Schnurr is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Canada Life Assurance Company.