Why Life Insurance Can be a Friend, Not a Foe, for Business OwnersInsights Feb 21 2019
By their nature, business owners tend to be drivers, but there’s one word that makes them shy away.
Don’t look away from your device. We’re talking about… insurance.
Whenever the dreaded “I” word is brought up, people tend to groan, act skeptical, or even tune out.
There are several reasons why both business owners and people in general tend to shy away from life insurance. Some of the excuses I’ve heard is “it’s too expensive, it’s not for me, I don’t understand it, or I don’t believe in it.” There’s also the classic business owner response: “I’ve got too many other things going on right now.”
Now, not knowing your personal situation, I don’t want to come out and say life insurance (specifically for business owners, corporate-owned life insurance) is for everyone. However, if you have assets you want to protect, tax bills you want to adjust, or if you want peace of mind for your family when you pass away, it’s certainly worth considering.
As my wise business partner often says: “would you rather have life insurance and not need it or, or need it and not have it?”
Here are some of the reasons why you should consider life insurance.
1. Ease Your Tax Burden
Business owners know all about taxes, especially since the federal government implemented on the new Tax on Splitting Income (TOSI) rules for 2018.
Life insurance, in most cases, is tax sheltered and pays out tax-free.
When you invest in corporate life insurance, if structured correctly, it doesn’t affect your passive income. That’s one big bonus of investing in life insurance, and it goes hand in hand with the next benefit.
2. Earn a Better Small Business Deduction
If you’re a Canadian Private Controlled Corporation (CCPC) with investment income above $50,000 per year, you are limited as to how much you can claim on your Small Business Deduction (SBD).
The new federal rules state that $5 will be taken away from your small business deduction for every $1 over the $50,000 mark. Once you hit $150,000 of investment income, you are NOT eligible for the small business deduction.
The current SBD is $500,000 federally, meaning that many small businesses will be hit hard by these rule changes. On top of that, the federal government has redefined what investment income is. Adjusted Aggregate Investment Income (AAII), the new term, includes income such as interest, royalties, portfolio dividends, rental income, and more.
Using corporate-owned life insurance to shelter investment dollars improves your chances of earning a larger SBD.
3. Investment Opportunities Within Insurance Policies
The main reason why people use life insurance as an investment vehicle is because in most cases, the money grows in your life insurance plan tax-deferred. Therefore, the income generated will not show up on tax returns.
Think of it as your money on steroids. A rough example is that a 3% rate of return could be more like a 5-6% return since it’s not taxed, even after adjusting for your premiums.
Insurance payouts or dividends also tend to be tax-free. With the right type of policy, once you have earned payouts or dividends for the year, that total is locked in and will never decrease. You can only go up from your new baseline.
Depending on the policy, another benefit is that you can buy, switch and sell parts of your investments without triggering capital gains. This is a great option for those who are closely involved in their investments.
4. Peace of Mind
If your business partner were to pass away tomorrow, what would you do? Or what would they do if you passed away?!
A corporate-owned life insurance policy can provide cash in lieu of a tragic situation. If you, your business partners or key employees were to pass away and weren’t insured, that would not only cause grief and sorrow, but it could sink your business.
Essentially, you’re creating liquidity in case of a tragedy. If the insured person dies, that policy pays out. Depending on how it was structured, it can fund the buyout of that person’s shares without hardship on the company.
How to Benefit Without Passing Away
One of the best pieces of collateral a bank likes to see is permanent life insurance with healthy cash values. Why is this beneficial? You know banks only lend you money if they are covered six ways to Sunday. Insurance is an iron-clad guarantee they get paid, so you get great rates and easy approval if you need to borrow for expansion, or to get you through a slow period.
You can also use it for retirement cash flow. If you set up a line of credit against your insurance policy, you can use it to draw on for cash flow in retirement. You don’t pay tax on that income because it’s a loan, and you don’t pay it back until you pass away. At the time of your passing, the policy pays out tax-free, the bank gets what they are owed, and your beneficiaries get the balance.
How’s that? Starting to like the possibilities that life insurance brings?!
How to Change Your Mindset Around Life Insurance
Think of your monthly payments not as a premium, but a contribution. What you’re building up by paying those premiums, you can use at a later date. You’re not just throwing your money away. It is an investment, a contribution, and one that can provide returns on top of that.
To achieve proper piece of mind with life insurance, make sure that your policy is properly structured to align with personal and business objectives. Who owns it? Personal or the corporation? Who’s the beneficiary?
Life insurance may not be right for you or your business. However, you won’t know unless you keep an open mind when discussing insurance.
Sit down with an Insurance Professional and let them understand your situation, needs and goals. Then, have them propose a solution. Once you have the numbers, don’t be shy about having your accountant review it. That way, everyone has a good understanding and can agree if this makes sense or not.
Remember: Insurance is a tool. Use it when appropriate as part of a cohesive wealth plan. Engage Professionals; having the right members on your team is really the first step. Then, be brave and IF Insurance is talked about, take a deep breath and look objectively at it.
Business Exit Specialist
604 372 3372