3 Reasons for business owners to have insurance

Here are the 3 best three reasons to buy insurance corporately vs. personally:

Funding a Buy-Sell Agreement

When two or more business owners are partners or primary shareholders, there is an immediate insurable interest in the affairs of the other.

Unless one properly plans for major events like death, illness or disability, the business may not pass to the correct successor.

Without a written legal agreement called a buy-sell agreement , the estate of the partner who passes away will go to their spouse, children or other immediate family or those people named in their will.

A buy-sell agreement is drafted between the partners with the help of a lawyer and maybe an accountant. It should stipulate the cost to buy out the assets of the deceased by the surviving partner/shareholder, or at least stipulate the way the business's value would be determined in the future.

Insurance is used as the Funding Mechanism.

A life insurance policy would provide a large amount of tax free cash liquidity into the company which can then be used to buy out the interest of the deceased's heirs.

Often term life insurance is used to fund these sorts of agreements.  This allows the business to reinvest its retained earnings vs. holding cash in case of an emergency.

Protect the business from loss of key-people

Besides death there are other risks – such as illness or injury that will prevent business owners from working.

While the buy-sell life insurance is usually in place to fund the death of a partner it is important to consider covering off the possibility of illness or injury.

What if an owner or partner became critically ill or injured and could no longer contribute to running the business?  Then the business should insure for illness or injury as well.

These policies can also be owned by the business.

In some cases, like Business Overhead Expense insurance, the premiums can be tax deductible for the business.

Tax Sheltering Corporate Profits

Another great thing life insurance can do is provide a tax sheltered investment account for the business to shelter its retained earnings over the years. This tax sheltered account would be accessible to the company via withdrawals or loans to get it's hands on the cash if and when it would ever be needed. Also, in the future, the company can use the final death benefit as a source of business succession funding and it can create excess tax credits for the company.

Now, if you own the company it becomes an extension of yourself, and the benefits it receives flow through to your personal wealth and estate planning.

For example, taxation of passive business income (retained earning invested into GICs or something similar) is taxed at 44.67% in Alberta. Your business needs to make active income, not passive earnings. Passive money is best placed into a tax sheltering vehicle, and if you need insurance anyway, permanent life insurance with an investment account is a great option.

A term life insurance policy can be converted into a permanent policy with an investment account in the future.

If you are looking for innovative ways to protect your business interests…

The Next Step Is Yours.

Contact us today for more information.