A recurring question that we receive from a number of clients tends to centre around the ownership of life insurance, and whether or not it is best to hold policies personally or corporately.

There are many considerations that need to be made when reviewing the type, amount and duration of life insurance; this is something we can address at another time. Regardless of what type of life insurance you hold, you still need to pay for it. The question is, “Is it best for me to own and pay for the policy corporately or personally?” For simplicity, our examples will address term life insurance.

Personally Held Life Insurance

Life insurance that is held personally is paid for with personal funds. The premiums that you pay are made with after-tax personal earnings, and in the event of death the benefit is distributed to a beneficiary on a tax-free basis. This is the standard approach that is taken by the majority of individuals who hold life insurance; however, the majority of individuals do not have access to their own corporation.

Corporately Held Life Insurance

With corporately held life insurance, the company is listed as the owner and the beneficiary of the policy on the insured’s life. Policy owners must have an insurable interest in the life insured, which limits the coverage to those of shareholders and family members.

The main benefit through corporately held life insurance is through the premium payments. As with personal policies, premiums are paid in after-tax earnings; however, unlike personal tax rates, corporate tax rates are significantly lower than personal tax rates. The lower tax rates substantially reduce the gross earnings required to make those premium payments.

Using a $2,000 premium as an example, the table below outlines the overall impact when comparing British Columbia personal and corporate tax rates:

If you are in the top personal tax bracket in BC, you need to earn $3,690 to pay a $2,000 premium held personally. A corporation only needs to earn $2,312 in order to pay the same premium on a corporately owned policy. This is a savings of $1,378 per year, or $27,650 over the term of the policy. This all sounds great, but what happens upon death?

Upon Death

As we mentioned, with personal term life insurance the death benefit is distributed to the beneficiary on a tax-free basis. The same is true for a corporately held policy, but a few additional steps are required.

Death benefits of the corporately held life insurance policy are paid to the beneficiary (the company) on a tax-free basis. What happens next is a matter of accounting. The entire amount is deposited into the company bank account as cash, with an amount equal to the proceeds less the adjusted cost base of the policy credited to a notional account known as the capital dividend account. Funds credited to the capital dividend account may be removed from the company on a tax-free basis as long as the proper elections are filed with the CRA. It should be noted that most term life insurance policies have little or no adjusted cost base, so most – or all – of the insurance proceeds can be removed from the company tax-free.

Conclusion

From a tax point of view, having corporately held life insurance policies may allow you to save quite a bit of money on your premiums by taking advantage of the differential tax rates between individuals and corporations. If you currently have personally held life insurance, it would be worthwhile to speak with someone at TPC Financial about the specifics of your individual policies, as well as review all implications prior to transfer.

If you have any additional questions, please do not hesitate to contact a TPC professional to review your situation.