Business owners often employ a comprehensive team of professionals to manage their complex interests. However, they often overlook the benefits that insurance can offer.
1. Minimize their corporate tax during lifetime asset accumulation
2. Minimize their tax at death through the capital dividend account (CDA):
3. Preserve and improve liquidity for their business
Sun Life provides you with a wealth of resources to guide you in your discussions with business owners and their centres of influence. Use the strategies, concepts, and guides from the Resources page to demonstrate the benefits insurance can offer.
What happens when clients have liabilities they need to cover in the event of death? The immediate reaction tends to focus on finding the cheapest way of securing that protection. They may see covering the liability with insurance as another expense that reduces cash flow or retained earnings, which could have been used to support business growth. Basically, their goal is to minimize expenses to help cover the need. In this case, term insurance can be the obvious choice, especially when the liability is short term in nature.
Let’s look at another value-add solution. One that helps ensure the business owner is truly informed about their options that go beyond simple term insurance.
Permanent insurance costs more than term insurance. By demonstrating how the sale of permanent insurance bolsters the balance sheet, advisors can help clients see the value in the higher cost.
Let’s look at an example of the balance sheet impact of a hypothetical lower premium term policy vs. a higher premium participating whole life insurance product with early cash surrender value (CSV) (Quick Pay Permanent) over the first 20 years*:
Accountants understand net negative income flows. Advisors may not be familiar with this terminology, because only positive income flows are typically looked at as income. Advisors must know that while a policy earns income (i.e. money that is tax sheltered within the policy), at a certain point, policy premium(s) paid may be less than policy growth. At that point, the policy is making money and the overall effect is positive income that’s not taxable.
Permanent insurance can help cover the business owner for their entire life. And unlike term insurance, it includes the potential for a cash accumulation fund. Investments in the fund are tax-preferred, including at death when the tax-free death benefit is paid out to a named beneficiary.
An additional benefit of permanent life insurance is that allocating funds in a corporation away from taxable investments to a permanent life insurance policy can help reduce overall annual taxable investment income.
In the above scenario, the full death benefit can pass through the CDA in 34 years. Before the 34th year, at least 70% of the death benefit will be available to the CDA with the excess treated as other assets.
1 For this to happen, the corporation is both the owner and the beneficiary of the policy.
Corporate-owned permanent life insurance is a great tool for business owners. And to unlock its potential, they often turn to accounting professionals.
But there’s a problem. There are no clear guidelines in Canada on accounting for corporate-owned insurance. Accountants often turn to insurance professionals for answers.
Booking the Insurance Transaction is a new resource that provides much-needed guidelines to accountants dealing with corporate policies. This is the first resource of its kind in Canada. It helps you connect with Chartered Professional Accountants (CPAs) and offer them an accounting framework to yield the full benefits of a permanent life insurance policy for Clients.
Booking the Insurance Transaction contains best practice guidelines for:
It’s a great resource for accountants and business owners. And a great opportunity for you.
Speak to a sales representative for information.
Speak to a sales representative for information.
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