Best Corporate Financial Planning Considers the Benefits of Business Insurance
Most people hate life insurance. There are even fewer people that want to buy life insurance. The people that like it are the individuals that realize what life insurance can do for them and their business. The only other people who want to buy life insurance are the one’s that realize that they are no longer insurable or eligible to buy insurance usually due to a health issue.
We are going to discuss permanent life insurance for business owners and the benefits of business insurance and how it can assist in corporate financial planning, business protection, succession planning and ultimately building considerable wealth by leveraging permanent insurance within a corporation.
- Tax-Free Growth: By overfunding a permanent life insurance policy, excess cash reserves grow tax-free. Conversely, passive investments held within a corporation are subject to the highest corporate tax rate regardless if you qualify for the small business tax rate (under $500,000) as a Canadian-controlled private corporation (CCPC)
- Succession Planning: Purchasing a permanent life insurance policy on a future stakeholder can not only retain top talent within an organization but allow the seller of the business to get top dollar in selling the organization. It not only allows the future purchaser to potentially not have to write as big a personal cheque but use the cash value in a permanent life policy (up to 95% of the cash value) as collateral in the buyout.
- Tax-Effectively Get Retained Earnings Out of the Business: A corporately-owned permanent life insurance policy is paid for with corporate after-tax dollars. The overfunded policy grows tax-free and can be leveraged in different ways to get money out of the business. The alternative is to dividend out money to the business owner at the business owner’s personal marginal tax rate.
- Term Life Policies Can Be Converted To Permanent Life: Most term policies have guaranteed renewals. The challenge is the cost of renewing term policies usually results in the cost being five times the expense of the original. Term insurance is cheap when you’re young but gets incredibly expensive over time. Term typically is not renewable after the age of 80 or 85 so if you’re planning to leave any death benefit, make sure you leave permanent. The earlier you convert a term policy to permanent life, the longer the growth effect will occur within the policy.
- Quick Pay Life Options: You can purchase permanent life insurance that can be completely paid off in 15-20 years. For those who don’t want to continue paying life insurance after they are no longer working, this is an attractive feature because depending upon the type of policy. The cash value will only continue to increase over time and still offer a guaranteed death benefit.
- Cash Values Can Pay Insurance Premiums: As the residual cash values continue to grow within your permanent life policy, you can have the cash value pay off the annual life insurance premiums. This is effective in an off business year where the company cashflow can’t afford to pay the permanent life insurance.
- Leveraging the Cash Value as Collateral for a Business Loan: Up to 95% of the cash value of certain permanent life insurance policies can be used as collateral at many financial institutions. This money can be utilized to access funds for a business loan or mortgage by your corporation.
- Start an Insurance Retirement Plan (IRP): You can start an Insurance Retirement Plan by leveraging a corporately-owned permanent life policy. By paying into this with corporate after-tax dollars, you can get retained earning out of your business in a tax-preferred way. The cash value in the IRP continues to grow over time, and by leveraging the concept in #7 can supplement or finance your business retirement.
- Utilizing Extra Deposit Options to Build Cash Reserves: In conjunction with #8, instead of buying more insurance, you have the ability to purchase Extra Deposit Options within a permanent insurance contract. The benefit of this in you are not buying additional insurance but instead gives you the ability t0 build up greater cash reserves at a faster pace which can be utilized within #7 or #8.
- Guarantee Against Loss of Future Insurability: Insurance is to mitigate against random events that can affect your future livelihood or the livelihood of your family or business. Being stricken by a critical illness will, in all likeliness, affect your ability to become insured in the future. A permanent life insurance policy once issued is a life-long contract and can not be rescinded or cancelled provided you continue to pay the specified premiums regardless of your health. The value of a life insurance contract is infinitely more valuable once someone is unable to qualify for insurance anymore.
- Estate Planning: For those business owners who are looking to leave a legacy to loved ones, charity or satisfy any future capital gains taxes, permanent insurance is the best solution to take care of these estate planning needs successfully.
- Equalization for Children: Let’s say you have two adult children. One child decides that he wants to join the family business. The younger daughter decides to forge a career in another direction aside from the family business. If most of your wealth is wrapped up in your business, how can you ensure some equalization for your daughter who decided to go in another direction? By utilizing a permanent insurance policy, you will nicely satisfy any inequality that may exist between your children outside of the business.
The benefits of leveraging a permanent life insurance policy as a business owner are considerable. Several other strategies are available to undertake and explore. If you have a profitable corporation, life insurance affords you some tremendous tax favourable opportunities to get retained earning out of your business and into your personal portfolio.
Many of these concepts are talked about in vague terms, and not all strategies are appropriate for all business owners. Careful consideration should be undertaken with your financial professional and insurance advisor to ensure the appropriate products and strategies are right for you.
Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies and allow them to create a strategy 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 oversites and ultimately control where their finish line ends.