Key person insurance helps your business recover from the loss, disability, or illness of someone who is invaluable to your company. If a key employee were to pass away or become unable to work, key person insurance can help you to: recruit, hire and train a replacement, pay off debt and manage creditors, ease lenders’ concerns about your company’s financial health and reassure customers, employees and investors that your business will survive.
If your company has two or more owners, buy sell insurance can keep your business running and protect the financial interests of each owner’s family in the case of a death or disability. Typically, the owners or partners will draft a shareholder’s agreement that will require that the owners or partners to purchase a deceased or disabled owner’s shares in the case of death or disability. Buy-sell life and/or disability insurance is the most common method for funding the shareholders agreement. This will ensure that there will be funds available for the surviving partner to purchase the shares from deceased partner’s widow or estate (or from the disabled shareholder in the case of a disability).
Business Overhead Expense (BOE) Insurance
Business overhead expense insurance can help your business meet its ongoing expenses if you or a co-worker become disabled and are unable to generate income. BOE can help you cover ongoing expenses such as rent, property taxes, utilities as well as pay salaries to retain valuable employees and keep your business running.
Wage Loss Replacement Plans (WLRP)
A wage loss replacement plan is a group of two of more individual disability policies owned and paid for by an employer with benefits payable to an employee. Properly implemented, the arrangement is considered a group accident and sickness plan for tax purposes. The premium is tax deductible to the company and will not be included in the employee’s income as a taxable benefit. A WLRP it typically offered at the executive level for key employees or management and will have stronger definitions compared to group insurance. WLRP’s are effective as they stabilize costs and eliminates the uncertainty associated with the fluctuation of group insurance rates. The cost for the employer to pay premiums for a WLRP is lower than the cost to increase the employee’s salary to allow them to pay the premiums personally.
Shared Ownership Critical Illness
An arrangement where an employer and an employee split the cost of a critical illness policy and share the benefits. Typically, the employer pays for and is entitled to the critical illness benefit, and the employee pays for and is entitled to the return-of-premium benefit under the terms of a written agreement between the employer and the employee. If the employee becomes ill the corporation receives the benefit amount. If not, the employee receives the return of premium benefit, equal to the sum of both the employer and employee contributions.
Corporate Insured Retirement Plans (CIRP)
Corporations are taxed at the top rate on passive income from corporate assets and passive income does not qualify for the small business deduction. The Corporate Insured Retirement Plan is a tax-exempt life insurance strategy that lowers the corporation’s passive income exposure, which reduces the amount of tax payable. Structured correctly it can assist you in protecting the corporation’s financial interests in the case of death, while giving you a tax-free income throughout retirement.
Estate Planning for Business Owners
If you are a business owner with private corporation shares you can get hit with a double (or even triple) tax upon death. This happens because there is a deemed disposition on death at FMV which results in a capital gain, then when shares are redeemed or corporation is wound up a taxable dividend can arise, then on top of that there are potential capital gains on disposition of corporate assets! Life insurance is an effective way to reduce the double tax in the corporation.