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Corporate Owned Life Insurance
As a shareholder, there may be a need for life insurance owned by the corporation on the lives of one or more shareholders for various purposes such as pure investment, debt security, or financing the buy-out of one of the shareholders on death. This issue is complex and requires the advice of a Chartered Accountant. Here are some of the benefits and cons of corporate owned life insurance.
Benefits
The premiums are generally not deductible to the corporation (except in cases where it is required to secure debt, but only to certain limits) but the premiums are paid with low after-tax dollars of the corporation compared to if paid by the individual shareholder. Click HERE for a list of corporate and personal tax rates.
Premiums on policies of different shareholders vary because of age, etc. By having a company pay the premiums, the cost can be spread evenly amongst the shareholders.
If the insurance is paid out, generally most of the proceeds can be paid out tax free to the surviving shareholder(s).
Cons
Creditors may have the first right to insurance proceeds.
The cash surrender value of the policy is not an active business asset. Therefore, if a large value is built up in the company, the company may not qualify as a small business corporation. If this happens, then the capital gain on the sale of the shares of the corporation cannot be sheltered by the $500,000 capital gains exemption.
Sometimes life insurance comes bundled with disability insurance and cannot be unbundled. There are tax disadvantages to having a corporation receive disability payments when those payments need to be paid out to a disabled shareholder. See a Chartered Accountant for more on this.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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