Using life insurance for corporate investment is one of its benefits! After deciding to compensate yourself with salary or dividends, you as a business owner, or the owner of a professional corporation, should consider how to invest your corporate retained earnings. You can either take advantage of infinite banking to invest the earnings through corporation or simply withdraw them for personal investment.

Corporate-Owned Life Insurance: What Is It?

As a business owner, you have two alternatives when determining whether to personally or corporately hold a life insurance policy.  What is the driving force behind your desire to be the owner of a corporation? While there are other aspects to consider when purchasing corporate-owned life insurance, utilizing low-tax company resources to cover insurance expenses is an advantage of corporate ownership.

When a corporation purchases a whole life insurance policy, it does so using corporate funds. Corporate dollars are subjected to a substantially lower tax rate compared to personal dollars (as little as 10.5 percent compared to 53.53 percent personal). As a result, the benefit of utilizing corporate funds to purchase insurance is that there is significantly greater purchasing power. Furthermore, corporately held permanent insurance (like Whole Life) takes the advantage of infinite banking to accrue capital value tax-free with no consequences to the company.

Who Is Corporate-Owned Insurance Appropriate For?

In light of infinite banking concept Canada, corporate-owned insurance is appropriate for small and medium-sized businesses. Individuals who own enterprises with retained revenues are also eligible for a corporate-owned insurance policy. Corporate-owned insurance is an excellent choice for health practitioners, dentists, or small company owners, irrespective of whether you’re a contractor, own a clothes shop, a coffee house, or any other type of startup business.

Being a business owner, taking advantage of the infinite banking concept Canada through a whole life insurance policy for your business will help you save a lot of money in taxes which is very critical for any business owner.

What Are the Benefits of Life Insurance Backed by IBC in Canada for Small Business Owners?

Business owners require life insurance coverage since, unlike traditional jobs, they do not typically receive any defined retirement benefit plan and are entirely accountable for safeguarding their economic future as well as assets. Owning and running a business is one of the most difficult occupations in Canada since life is full of unanticipated occurrences, and owning a business further contributes to the uncertainty. If you are a small business owner and you don’t have a life insurance policy powered by IBC in Canada, consider the following reasons why you need it:

There are so many specificities that exist for business owners when it comes to taxation, insurance, and financial preparedness and planning.

Taking Advantage of Infinite Banking for Corporate-Owned Insurance: How to Set it Up?

Basically, the corporate policy owner ought to be the policy’s beneficiary. If a shareholder is the beneficiary of a policy, the proportion of the annual premium paid by the corporation would most likely be considered a taxable shareholder benefit. Taxable shareholder benefits are taxed as ordinary income to the shareholder and not the corporation. So, it is possible for corporate policy owners to take advantage of infinite banking for their corporate insurances.

How Insurance Proceeds Owned by Corporations Can be Tax-Free

The net estate value of a corporation-owned life insurance policy is similar to that of a personally-owned policy. This is the result of the capital dividend account (CDA) of the corporation. Because of the CDA credit, life insurance proceeds are payable to shareholders as a tax-free capital dividend. However, it is important to note that this applies to only shareholders who are residents of Canada. The CDA of a private corporation is generally increased by the amount of life insurance proceeds received, minus the policy’s adjusted cost basis (ACB). A life insurance policy’s  ACB is typically equivalent to the accumulated premiums less the net cost of pure insurance (NCPI). The Income Tax Act (Canada) (ITA) describes NCPI as an assumed mortality cost, and it may eventually reduce the policy’s ACB to zero. So, corporate policy holders can take advantage of infinite banking concept to make their corporate owned policies tax-free.

The CDA credit would pay for the full amount of the life insurance proceeds. Provided the corporation has a CDA balance, it could also distribute a capital dividend to the shareholders who are Canadian residents tax-free. Based on the deceased shareholder’s estate plan, the shareholders could be the estate, the surviving husband or wife, or the dependents. A corporation may disburse capital dividends either as a cash dividend or as payment for share redemption.

How Can You Maximize Corporate-Owned Insurance Value by Taking Advantage of Infinite Banking?

Because money is retained at the corporate level rather than transferred to the owner of the business as a taxable distribution, there is a significant tax deferral (salary or dividend). The small business limit of the operating company may be reduced if such corporate resources are utilized to purchase investments that generate income subject to the maximum corporate rate, which varies by territory or province and can be between 48.7% and 54.7%. The cash value growth of a tax-exempt life insurance policy, on the other hand, is tax-advantaged, meaning that not subjected to taxation.   As opposed to other types of passive corporate income, the policy’s growth is unaffected by taxation, and it doesn’t reduce the small business limit of the corporation. The CDA as well as tax-advantaged growth in a policy are two distinct benefits of life insurance that are not enjoyed in corporate investments. Consequently, it is a technique of passing on corporate wealth to a partner or beneficiaries by taking advantage of infinite banking concept.

Pros and Cons of Taking Advantage of Infinite Banking for Investing Through Corporate-Owned Life Insurance

The key advantage of retaining money in a corporation is the lower tax rate, particularly in comparison to individual income tax rates. When retained in the corporation, it creates room for a relatively huge after-tax investment.

Nevertheless, there are risks to corporate investments that you must consider. To begin with, passive investment income within a corporation is taxable at the lowest possible rate. Meaning that any investment income generated within a corporation could be taxed at roughly 50%.

Secondly, following Canadian tax regulations, the investment income of the previous year now cuts down the federal startup deduction by $5 on every $1 that surpasses $50,000. In practice, for a corporation making 5% on $1 million in retained profits or $50,000 in investment earnings, every dollar earned above this amount decreases the federal small business deduction by $5. Moreover, after earning $150,000, the deduction is completely eliminated.

How to Take Advantage of Infinite Banking for Investment Using Corporate-Owned Life Insurance

Here is where life insurance comes into play. Cash value and permanent policies including whole life and universal life policies grow tax-free. Apart from being the owner, the corporation must also be the policy’s beneficiary. This permits a smooth investment of corporate retained earnings with little passive income rates of tax and with no need to cut the small business deduction. So, you as a business owner can take advantage of infinite banking for corporate investment.

A life insurance policy held by a corporation is a tax-advantaged investment vehicle. The policy is similar to having a corporate savings account that is tax-free with numerous extra advantages. You can take advantage of infinite banking to utilize a corporate-owned insurance policy as collateral to borrow for investment purposes. The policy also provides an incredibly effective method of distributing corporate retained income and could even enable more assets to circulate out of the corporation through a national capital dividends account tax-free.