Many businesses recognize that their personnel’s skill sets are critical to their success. As a result, they purchase whole life insurance policies for their personnel, who are typically top-level executives as well as other staff members whose operations are important to the company. The premiums are paid for by the company. This makes sure that its economic interests are safeguarded and that financial losses are mitigated if the insured personnel die. In the event the covered employee passes away, the employer gets the whole death benefit. Corporations are required to notify their personnel in writing about the policy as well as the beneficiaries in case they pass away. Continue reading to find out more about infinite banking concept or IBC in Canada through a corporation or corporate-owned whole life insurance.

What is a Corporation Owned Life Insurance

Corporate-owned life insurance is long-term life insurance acquired by a company to protect staff, executives, shareholders, or other key individuals.

Originally, corporation-owned life insurance was meant to cover against the financial risk of losing critical personnel (“key person insurance”), like the costs involved in finding a replacement or diminished revenue due to lost customers or decreased productivity.

Because corporation-owned life insurance policies yield tax-advantaged gains and accrue cash value, many organizations have lately expanded their programs to a larger number of personnel and used their earnings to cover long-term liabilities such as employee benefits as well as deferred compensation packages.

Corporation-owned life insurance is also widely viewed as a source of liquidity either to finance a buy-sell agreement-based buyout or contractual stock buy-backs.

Corporation-owned life insurance is especially popular among large enterprises and financial organizations.

More than half of the top American corporations, as well as the great majority of banking firms, have life insurance plans that cover their officials or critical workers.

Having said that, any company with long-term staff obligations and enough funds to fund premiums can possibly benefit from corporation-owned life insurance.

Infinite banking through a corporation, just like any other policy, has benefits and drawbacks. The following are some of the benefits and drawbacks of infinite banking concept or IBC in Canada through a corporation.

The Benefits of Infinite Banking Concept Canada Through Corporation

• The demise of an individual whose contributions are vital to the company’s operation could result in a considerable financial loss. Finding an appropriate substitute to fill the void left by the departed staff is always difficult. Should they be identified, this could take them days, weeks, or an indefinite length of time to adapt and begin performing at the deceased employee’s capacity. During that time, the insurance provides the funds required to pay back loans, recruit and train new personnel, evade losses, as well as maintain the required working capital.

• If the company is jointly owned and one of the stakeholders passes away, the remaining dependents are usually not keen on continuing to be associated with the company; the proceeds may be utilized to buy out the shares of the departed shareholder as well as the beneficiaries. This guarantees that the company has adequate funds for everyday operations while also allowing the deceased’s relatives to receive some funds for personal use. This also serves as a succession plan because it describes what will happen if a specific shareholder dies. It aids in the prevention of potential disputes.

• Assume the corporation is largely dependent on a single or more employees’ skills, knowledge, reputation, or leadership, and their death could result in the collapse of the enterprise. In that instance, the proceeds from a whole life insurance policy might serve as a reprieve for the shareholders.

• Cash value options: policyholders have the opportunity to use the cash value of the policy, which allows them to have extra cash flow.

• Tax-free growth: A corporate whole life insurance policy enables tax savings by allowing its value to increase tax-free in addition to providing a tax-free death benefit.

• Loans—To secure loans, banking institutions need enterprises to provide personal guarantees by the proprietor. This suggests that the company’s assets are accounted for any outstanding debts that the firm may be unable to pay; thus, a whole life insurance policy provides safer collateral. Certain institutions need a life insurance policy as one of their lending conditions; therefore, owning one boosts the company’s potential to obtain financing.

• Lower premium costs—when the policy is owned by the corporation, the premiums are paid from corporate finances, which are just taxed at the corporate scale. Corporate taxes are comparatively lower than personal taxes. Premiums paid with personal funds acquired via a corporation are taxable at a higher rate. Should they be obtained as dividends, they are subjected to both personal and corporate taxation.

The Drawbacks of Infinite Banking Concept Canada Through Corporation

• If the policyholder or a shareholder opts to exit the company, tax issues arise, and the insurance must be valued by an actuary. When it is left with the firm, it only benefits the remaining owners at the expense of the client, who may find it difficult to obtain supplementary insurance for his individual requirements because he may be uninsurable or merely insurable at increased rates.

• Lender claims may pose a risk to the policy or its proceeds. If the corporation identifies an irrevocable beneficiary to collect the proceeds, the policy is shielded from creditors. However, assuming the corporation wants to report the death to its dividend account without the modified cost base. In that instance, it must declare itself the beneficiary, rendering the policy proceeds vulnerable to recovery by creditors.

• Policy control—sole shareholder corporations do not have concerns about who manages the corporation; however, across most corporations with multiple shareholders, where each of them has different ownership rights, decision-making on maintenance operations is largely dictated by the shareholders that control the largest proportion of the company’s shares. The policyholder may not necessarily be one of the people controlling the largest shares and, as a result, may have little impact on how the company’s assets, such as whole life insurance policies, are utilized. The intended goal of the corporate life insurance policy is not guaranteed if there isn’t a current agreement in place.

• Some tax benefits may not be available. Dividends are usually paid to the capital dividend account of the company and distributed tax-free to shareholders. Suppose, however, that when the policyholder passes away, the capital dividend account is negative. If the negative balance is greater than the death benefits of the policy, the proceeds going to the account of the shareholders will be lowered or reduced.

• New shareholders. when a company experiences growth and attracts new shareholders in the process, the initial objective of having practically the entire death benefits flow into the capital dividend account of the deceased may be hindered.

The lifetime capital gains tax of $750,000 can be avoided for micro-business corporations. This means that if a shareholder decides to sell their shares, they may save around $170,000. To qualify for this exemption, the business must meet certain criteria: it must be inactive for 90% of its fair market value, and during the two years preceding the gain, 50% of the fair market value must have been in use. Additionally, it’s worth noting that cash values in corporate life insurance policies are considered passive assets and do not count towards these criteria, which could allow the company to qualify as a micro-business corporation and avoid the capital gains tax.

Final Word

Purchasing corporate-owned insurance has both merits and downsides. The main advantage is the tax breaks. The most significant disadvantage is the lack of creditor protection. However, with meticulous planning, the benefits of holding a corporate-owned policy generally outweigh the drawbacks. Your financial advisors can assist you in determining if corporate-owned insurance coverage can benefit the operations of your company.