Insurance for Business Owners

  • January 03, 2024
  • Holly LeValliant and Jay Hershfield, Scotia Wealth Management

Insurance can be a useful tool for someone making their estate plan, but for business owners there are unique advantages. A business owner may use insurance to provide for the smooth transfer of their business, to equalize their estate, and to maximize the value of their estate. 

Providing for a Smooth Transfer

Insurance can be a cost-effective way to provide for liquidity in an estate, so a business can be transferred smoothly to the beneficiaries. The death of the business owner will trigger a deemed disposition of their shares at fair market value immediately before death. A resulting taxable capital gain on the growth of the shares may be owing, and an insurance policy can provide a tax-free payment to the beneficiaries so they can pay the tax liability that will be owing.  By naming beneficiaries of an insurance policy, probate tax will not be payable on the payment and a creditor of the estate cannot make a claim for it. 

In many cases, a corporate-owned life insurance policy makes sense, where the company is both the owner and the beneficiary of the policy. Generally, corporations have a lower income tax rate than for an individual, so the after-tax cost of the premiums may be lower if it is paid by the corporation rather than the person. Upon the death of the person whose life is insured, the corporation receives the life insurance proceeds and it may be paid as a dividend to the shareholders. The death benefit above the adjusted cost basis is credited to the company’s Capital Dividend Account (”CDA”) and can be paid out tax free to the remaining shareholders. The shareholders/estate can then use the dividends to pay the taxes owing by the company. 

Liquidity is very important to most affluent individuals as the tax bill is based on assets that are often not liquid or whose values have changed since the deemed disposition and might not be able to generate the cash flow needed to pay taxes if value changes between the date of death and the date taxes are due.

Insurance may be useful in an estate freeze to pay for the future tax liability of the company. With the proceeds from the policy, the company can continue operating so it can be sold for the best price possible or while the management team is being reorganized and allow frozen shares to be bought out.