Daren Givoque, Financial Advisor
O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
Let’s face it. Life insurance is not a desirable topic of conversation. This is because it can be expensive, and it only pays out if something bad happens. Who wants to think about that?
For business owners though, big or small, there are a few situations where having life insurance can solve some pretty big problems. Here are a few scenarios where life insurance can be an invaluable tool for you and your company.
Death of a key person
Does your business rely heavily on the work of one or more individuals? What would happen to your business if that personal suddenly became ill or suffered an injury and was no longer able to perform their duties? Key person insurance can help cover day-to-day business expenses and ensure your business can continue on during this difficult time. One great thing about a business purchasing key man insurance is that the premiums are tax deductible. As long as the policy makes sense (i.e. you are not purchasing a $500,000 policy for a debt that is worth $100,000) you will be able to claim it as a business expense on your tax return.
Equalizing an estate
In the event of your death you will probably want to make sure all your children receive an equal percentage of your estate. If you are a business owner you may have a few of your children working with you, while the others may have chosen a different career path. Instead of leaving shares of the business to all your children, reserve those shares for the children who actually have a stake in the company. A life insurance policy will make sure that you have the cash to equal the value of those shares to give to your children who are not active in the business. This could go a long way to mitigating potential conflict in your family after you pass away.
Covering taxes on death
Surprisingly, death is the time in your life when you are most heavily taxed. When you pass away you will be deemed to have sold you private company shares. You may be able to claim the lifetime capital gains exemption up to $ 848,252 (in 2018) but you could end up paying 25 per cent tax on anything that falls outside that exemption. Having insurance is a good way to ensure your executor will be able to pay that tax bill upon your death.
Providing for your heirs
If you are one of many shareholders in your company, having an insurance policy on your life will help provide from them, or the company, once you are gone. Cash from an insurance payout can be used to buy your shares from your estate so your heirs can ultimately benefit from them. If you have left your shares to your family, cash from an insurance payout will allow active stakeholders to buy the shares from your spouse/kids so they get a payout and your business partners maintain control of the business.
An excellent investment vehicle
Whole life insurance has the benefit of paying out no matter what. If you die at 55 or 105 you will be paid out. It also comes with the added bonus of having an investment side to the policy. By overpaying the premiums, you build up an investment account which is not taxable. This is a great way for business owners and high net-worth individuals to shelter money once their TFSA and RRSPs are maxed out. These investments are tax-free and are available for you to use at any time. This is a great way to both save for retirement or leave a larger sum of money to your children.
As a business owner it is a great idea to talk to an insurance professional to find out which insurance products would be the best for your situation. Proper planning will ensure that things both within your business and at home will run smoothly in the event of sickness or death.