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You already know that Life Insurance can help protect your business by making funds available to pay off debts, to fund buy sell agreements, and keep the business running. But did you know it can also benefit you and your business during your lifetime?
Simply redirect surplus money from the business into a properly designed participating dividend paying whole life policy rather than passive investments. The policy’s contractually guaranteed daily growth of cash value is NOT captured by the passive investment tax rules.
The 4 phases
2. Control your banking
The Corporation’s surplus capital or profits must reside somewhere. Your business purchases a participating dividend paying whole life insurance contract (or system of contracts). By redirecting a portion of surplus money from your business into a policy rather than passive investments, your corporation pays less tax today and in the future.
The daily growth of cash value represents a significant advantage your business and is an asset on your balance sheet. When your business needs new equipment, inventory, real estate, etc., the business can use the cash value as collateral for a policy loan from the life insurance company. No more bankers, gatekeepers, personal guarantees or qualifying. You are in total control.
You are a dentist and you operate a Clinic. Let’s presume that your business pays $30,000 a year into a corporate owned policy that is maximized for rapid cash value growth. The policy has accumulated $100,000 of cash value and has a $1,000,000 death benefit. The Clinic requires $40,000 for a new operatory. You call the life insurance company and request a $50,000 policy loan. The Life Insurance Company asks you two questions. (1) Would you like the money directly deposited into your Corporate Bank Account or (2) Would you like us to mail you a check? Your entire $100,000 continues growing daily inside the policy, uninterrupted by the policy loan. You control the repayment schedule of the loan and everything that you repay is instantly re-accessible. A lien is placed on the $1,000,000 death benefit for the outstanding loan balance. The simple interest on the policy loan is tax deductible to your business and that deduction reduces the business’s taxable income. How convenient and ridiculously simple is that? Picture a day when you no longer have money permanently flowing away from your business and by proxy, you … rather you have money flowing back to your business.
Supplement your Retirement Cash Flow
You can utilize the policy’s cash value as collateral for retirement income. One option is to apply for a commercial bank loan / or line of credit and collaterally assign the policy.
Everyone has a best before date. And when that day comes, the proceeds of the life insurance policy are paid to the corporation. The total proceeds minus (-) the adjusted cost basis of the policy are credited to the Capital Dividend Account of the corporation and can be paid out to the surviving shareholder(s) by way of tax free capital dividends.
It’s not only wealthy people who can use the corporate-owned life insurance in a way that is tax-effective to amass passive wealth in an organization, to get that wealth free of tax, and then transferring the wealth to living beneficiaries tax-free.
Originally, Corporate Owned Life Insurance (COLI) was purchased by an organization for executives and more important employed people to safeguard against the monetary burden of losing important employees to unforeseen death, the probability of enlisting and training persons to replace important or highly knowledgeable persons or to finance corporate obligations in redeeming stock if the owner dies. This method is referred to as “key man” or sometimes “key person” life insurance.
The typical entrepreneur spends just 8 hours planning for succession having spent around sixty -five years establishing their business. It’s no wonder plans for transitioning wealth fail at a rate of 70%. This means that just 30 percent of the family successions reach the second generation and only 1/10 of the successful successions from the second generation get to the third generation.
One benefit of having Corporate-Owned Life Insurance is the fact that payment of premiums is done with corporate profits after tax, whose taxation rates are much lower than the personal shareholder’s tax rate. Notably, the rate of corporate tax applicable to functional business earnings in the province of Ontario is roughly 15% and 50% to investment earnings. In Ontario, the highest personal rate of marginal tax is roughly 53%.
Another benefit is that when death comes, the deceased person is considered to have disposed of all their capital property at fair market value at the moment of death. This deemed disposition rule also relates to shares of a corporation. The Income Tax Act asks to evaluate the insurance policy based on the cash surrender value at the moment before death. Generally, this value is going to be less than what the policy would pay in case of death, in addition to being notably smaller than the property’s value that probably would have been stockpiled by the company if it hadn’t bought the policy. As a result, acquiring life insurance will also help to reduce the tax that is payable in case of death with respect to shares that are owned by a private company because it will result in a reduced valuation for all those corporate shares that didn’t have life insurance purchased.
Although there exists numerous benefits and at the same time, flexible strategizing opportunities when acquiring and utilizing life insurance via a private company, there exists a list of additional items that should be considered. Corporate tax complexities, shareholder agreements, accounting and compliance in respect to capital dividends.
At Ascendant, we have Chartered Accounting, Trust and Estate Planning Advisors and expertise to make sure the planning is done accurately and that compliance and administrative items are all addressed.
Schedule a call with one of our financial experts to show you how you can benefit from borrowing against Corporate owned life insurance.