WHEN A REVIEW MAY HELP
Situations worth a closer look
- The business depends heavily on one owner, partner or key employee
- A shareholder or partnership agreement creates a funding obligation after death or disability
- The business has loans, guarantees or other obligations tied to an owner
- Owners want to review corporate-owned life-insurance concepts with their accountant or tax professional
- An incorporated professional has personal and business income-protection questions
WHAT WE CAN REVIEW
Bring the current picture together
Key-person life and health-insurance considerations
Buy-sell and shareholder-agreement funding questions
Business-loan protection and ownership obligations
Corporate-owned life-insurance concepts and policy ownership
Personal protection for owners and incorporated professionals
Coordination with lawyers, accountants and tax professionals
Insurance planning for business owners becomes clearer when the conversation begins with dependency rather than product type. Who does the business rely on? What obligation would arise if an owner died or became disabled? What debt or guarantee is connected to a particular person? What does a shareholder agreement require, and how would that requirement actually be funded?
Those questions can lead to different insurance considerations, but they can also reveal that a legal agreement, valuation, succession plan or emergency reserve needs attention first.
Key-person considerations
A key person may be an owner, salesperson, technical specialist, executive or other individual whose absence would affect revenue, financing, operations or important relationships. Insurance may help provide liquidity after death or serious illness, depending on the policy and business need.
The business should not choose a coverage amount simply by applying a generic multiple. A more useful approach is to consider the financial effect of the loss, expected recovery period, replacement cost, debt obligations and the role the person plays.
Buy-sell funding
A buy-sell or shareholder agreement may establish what happens to an owner’s shares after a triggering event. Insurance can sometimes provide funding for death or other insured events, but the insurance must align with the legal agreement and valuation method.
The policy does not replace the agreement. The lawyer, accountant and insurance advisor each address different parts of the arrangement.
Corporate-owned life insurance
Corporate ownership can be appropriate in some circumstances, including certain estate, succession or liquidity needs. It can also involve premium funding, policy values, adjusted cost basis, beneficiary arrangements and potential Capital Dividend Account considerations.
Those outcomes are not automatic. They depend on the policy structure, legislation and corporate circumstances, so the insurance discussion should be coordinated with the corporation’s accountant and tax professionals.
Important limitations and trade-offs
- Insurance does not guarantee business continuity or solve operational succession by itself.
- Tax treatment, Capital Dividend Account implications and corporate outcomes depend on legislation, policy structure and corporate circumstances.
- A legal agreement and valuation method should be reviewed by qualified legal and accounting professionals.
- Creditor protection or estate outcomes should never be assumed without legal advice and a review of the actual ownership and beneficiary structure.
How the consultation works
- Understand the current arrangement. Review what is already in place and what has changed.
- Clarify the question. Identify what deserves attention and what may already be appropriate.
- Evaluate available options. Discuss alternatives only where there is a clear reason, subject to eligibility, suitability and licensing requirements.
COMMON QUESTIONS
Questions worth asking
What is key-person insurance?
It is insurance intended to help address the financial effect of losing a person who is important to a business. The business first needs to identify the dependency and potential financial impact before choosing a policy amount or type.
How can insurance relate to a buy-sell agreement?
Insurance can be one possible source of funding for certain triggering events. The agreement itself, valuation method, ownership of the policy and tax treatment should be coordinated with the business's lawyer and accountant.
Can my corporation own life insurance?
A corporation may own life insurance in appropriate circumstances. Corporate ownership can create tax and estate considerations that depend on the contract, adjusted cost basis, beneficiary arrangement, legislation and corporate facts.
Do you provide corporate tax advice?
No. I can explain insurance concepts and coordinate the insurance discussion, but tax, accounting and legal conclusions should come from the appropriate professionals.