Corporate Owned Insurance - Do You Need It?
Bogress Financial Group
On a weekly basis we meet with business owners about reducing their tax liability at death and maximizing their estate. Often, these business owners have built their business from the ground up, are doing quite well, and they are thinking about the legacy and the estate that they want to leave behind.
The problem with corporate investments is the tax that you pay on that investment in every asset class. But what if there was another asset class that minimized tax?
Corporate Investment Account vs. Whole Life Insurance – A Comparison
Take the following illustration of a corporate investment account – $100,000 per year for 10 years in interest bearing investments. At age 90 the account would grow to about $2 million, but after tax would be a net of about $1.3 million to the shareholder's estate.
Scenario | Strategy | Gross Value at Age 90 | After-Tax / Net to Estate |
|---|---|---|---|
A | Corporate investment account ($100,000/year × 10 years, interest bearing) | ~$2,000,000 | ~$1,300,000 (net to shareholder estate after tax) |
B | Cash Value building Whole Life Policy ($100,000/year × 10 years) | Death Benefit: ~$3,500,000 | ~$2,500,000+ paid out tax-free through the Capital Dividend Account upon death (less any policy loans) |
What you can see in Scenario A is the overwhelming amount of tax due on the investment and how that eats away at the growth. In Scenario B, after 10 years we have a death benefit built up of nearly $3.5 million, $2.5 million of which would be paid out tax free through the Capital Dividend Account upon death, plus a cash value that can be accessed through a policy loan.
When should you consider Cash Value Whole Life Insurance inside your Corporation?
You're a significant shareholder in a Canadian Controlled Private Corporation
Age 40+ and healthy
Corporation has excess annual cash flow and/or investment assets not needed for business purposes (typically, been in business for at least 5 years)
Want to maximize your estate and transfer assets in a tax-efficient manner
Looking for stable and predictable asset growth (asset diversification)
Suitability Checklist – The more checkmarks, the greater the need for this strategy:
✔️ Business Succession plan in place?
✔️ Reduce tax on corporate investment income?
✔️ Desire to pass corporate assets to a beneficiary?
✔️ Have a corporate life insurance need?
✔️ Own taxable passive investment assets?
✔️ Own corporate investments with a deferred capital gain?
✔️ Want a certain amount of estate value guaranteed?
Curious to see if this concept works for your business? Contact us at info@bogressfinancialgroup.ca for a free consultation.
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