Tips for Key Employee Insurance
By Cyndy Batchelor
Financial Advisor, O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
Insurance Advisor, Assante Estate and Insurance Services Inc.
Many Business Owners operate their business without considering the impact of losing a key employee. While the first concern when an employee pass is always their family; Business Owners must also consider the effect that this will have on the business.
A key person is anyone that is integral to the business and whose loss would drastically impact the daily operations of the business. This could be the Owner, a top Salesperson, a manager, a technical expert, or someone with specific relationships within the business. Losing a key person may have several negative impacts. The business can experience a loss of sales or revenue, there may be increased costs to replace the employee, other employees may also leave, and customers may lose trust in the business. To plan for a key employee loss, businesses may set aside funds to deal with these costs, but these funds would likely be taxed at higher corporate tax rates.
There is an alternative to setting aside funds and that is through the purchase of a life insurance policy on key persons within the business. The life insurance policy is set up so that the business is the owner and the beneficiary of the policy, and the key person is the insured. On the death of the insured/key person, the business will receive a tax-free lump sum of cash which will cover any erroneous costs or lost revenue associated with their passing. In addition, corporate funded life insurance has added benefits beyond receiving loss coverage funds on the death of an employee. Private corporations are eligible to receive a credit to their capital dividend account (CDA) equal to the net death benefit proceeds of the life insurance policy less the ACB (adjusted cost basis). As such, at an appropriate time, the corporation can choose to make a payout up to the amount of the CDA account, tax-free to the shareholders.
Ensuring your key team members are insured is one of many reasons why a business owner should consider incorporating life insurance as a part of their business planning.
For additional information, contact your Financial Advisor.
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Cyndy Batchelor is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at 613.258.1997 or visit ofarrellwealth.com to discuss your circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc.
