Split-Dollar Critical Illness Insurance or Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is where the corporation is the owner and beneficiary of the death benefit and the shareholder, and an employee owns the cash value of the policy.
What is Split Dollar Critical Illness?
Recently there has been growing interest in applying this strategy to a Critical Illness policy. The concept is referred to as Shared Ownership or Split Dollar Critical Illness. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations:
- Upon death – If the insured dies without having submitted a claim for the critical illness the premiums paid are refunded;
- Upon termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded;
- Upon surrender – If the policy is surrendered without a claim, premiums paid are refunded.
Who Should Consider Split Dollar Critical Illness?
Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.
How does Split Dollar Critical Illness Insurance Work?
A Shared Ownership Agreement is drafted documenting:
- That the corporation will own, pay for and be the beneficiary of the CI coverage on the key shareholder or employee;
- That the shareholder will own and pay for the Return of Premium option upon the surrender of the policy.
Who Benefits from a Split Dollar Critical Illness Insurance Policy?
Under this arrangement, the company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded. Provided this is set up properly, the shareholder or business owner could receive the premium in a tax-preferred way.
Case Study
Barry applies for $500,000 of critical illness coverage with a return of premium benefit upon surrender. His company drafts a Letter of Direction and/or Shared Ownership Agreement, which stipulates that the corporation owns and is the beneficiary of the $500,000 CI benefit. In contrast, Barry owns and pays for the Return of Premium benefit.
Premium Structure
• The total annual premium for the policy is $ 9,131.
• The Corporation pays the cost of insurance $7,003
• Barry personally pays the ROP benefit of $2,128
How does Barry Benefit?
Twenty years later, when Barry turns 60, he determines that the CI coverage is no longer required. His company cancels the policy and Barry exercises his return of premium option. Barry receives a cheque from the insurance company for $182,628 Tax-Free.
This represents an after-tax rate of return on Barry’s annual ROP premium ($2,128) of 12.5% compound interest.
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Is this an important planning strategy?
Consider this*,
- One in three Canadians will develop life-threatening cancer;
- Half of all heart attack victims are under the age of 65;
- Each year 50,000 Canadians suffer a stroke with 75% of all victims being left with a disability.
The Split Dollar Critical Illness Strategy can result in significant financial benefits for the individual shareholder. At the same time, the Corporation enjoys the protection of its key employees against loss from a critical illness.
Call me if you would like to explore whether this strategy will benefit you and your company.
For Barry’s case study, Industrial Alliance’s Transition Critical Illness product with Flexible Return of Premium was illustrated. Of course, results will depend on age and amount plus product features will be varied by company.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
