Corporate-Owned Life Insurance - Benefits and Drawbacks

Source: The pros and cons of corporate-owned life insurance

Navigating corporate-owned life insurance can be a tax-savvy strategy for business owners, but it requires a well-coordinated effort between insurance advisors and accountants. Such policies typically involve the corporation as both policy owner and beneficiary, while the business owner or a key individual is the insured party.

One primary reason for utilizing corporate-owned life insurance is to secure funds to keep the business running in the event of the owner's death. Additionally, it can facilitate tax-free distributions to the owner's estate from the corporation's capital dividend account (CDA). The CDA tracks tax-free surpluses within the corporation and can issue tax-free capital dividends to shareholders.

Corporate insurance specialist Steve Meldrum highlights the advantages of holding life insurance through a corporation rather than personally. The lower corporate tax rate can lead to significant savings, as corporations can generate the same amount of after-tax dollars with less earnings compared to a business owner taxed at the highest personal rate.

Moreover, corporate-held life insurance may benefit business owners seeking tax-advantaged options for excess funds, especially if they have maximized their RRSPs and TFSAs. Certain life insurance policies' investment income remains exempt from the federal passive-income limit, preserving the small-business deduction.

However, corporate-owned life insurance has potential downsides. It may affect a business's status under the Income Tax Act's "small business corporation" test, impacting the lifetime capital gains exemption. Additionally, such policies lack creditor protection, making them vulnerable to creditor claims.

It's crucial to involve accountants in discussions surrounding corporate-owned life insurance. Accountants possess a broader understanding of a client's financial status and existing strategies. Collaborative planning ensures efficient and unbiased decision-making, enhancing financial flexibility and tax efficiency. Regular updates and communication between advisors and professionals contribute to the success of this strategic approach.

For full details, you can read the following article here: Source: The pros and cons of corporate-owned life insurance.

For more information on how you can benefit from owning Corporate-owned Life Insurance, contact me at (604) 855-6846. Or you can email me at [email protected]

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