subject: 3 Reasons Business Partners Should Buy Insurance on Each Other [print this page] 3 Reasons Business Partners Should Buy Insurance on Each Other
When a corporation or partnership inCanadabuys insurance on the owners or key people there are usually three reasons. These reasons are not mutually exclusive, so one insurance policy can kill two or three birds with one stone. Here are whatwe consider to be the best three reasons to buy insurance corporately vs. personally:
Funding a Buy-Sell Agreement
When two or more business owners are partners or primary shareholders, there is an immediate insurable interest in the affairs of the other. Unfortunately for each partner, unless you properly plan for major events like death, illness or disability, the business may not pass to the correct successor. Without a written legal agreement called a buy-sell agreement or U.S.A. (universal shareholders Agreement), the estate of the partner who passes away will go to their spouse, children or other immediate family or those people named in their will. A buy-sell agreement is drafted between the two partners with the help of a lawyer and maybe an accountant. It should stipulate the cost to buy out the assets of the deceased by the surviving partner/shareholder, or at least stipulate the way the business's value would be determined in the future. Insurance is used as the Funding Mechanism. A life insurance policy would provide a large amount of tax free cash liquidity into the company which can then be used to buy out the interest of the deceased's heirs. Often term life insurance is used to fund these sorts of agreements, and allows the business to reinvest its retained earnings vs. holding cash in case of an emergency.
Tax Sheltering Corporate Profits
Another great thing life insurance can do is provide a tax sheltered investment account for the business to shelter its retained earnings over the years. This tax sheltered account would be accessible to the company via withdrawals or loans to get it's hands on the cash if and when they would ever need it. Also, in the future, the company can use the final death benefit as a source of business succession funding and it can create excess tax credits for the company. Now, if you own the company it becomes an extension of yourself, and the benefits it receives flow through to your personal wealth and estate planning. For example, taxation of passive business income (retained earning invested into GICs or something similar) is taxed at 44.67% in Alberta. Your business needs to make active income, not passive earnings. Passive money is best placed into a tax sheltering vehicle, and if you need insurance anyway, permanent life insurance with an investment account is agreat option. A term life insurance policy can be converted into a permanent policywith an investment account in the futureif the business is not yet creating large profits.
Protect the business from loss of key-people
Often, in the case of active business owners, the risk here is from illness or injury preventing them from working. The buy-sell life insurance is usually in place to fund the death of a partner. What if he/she because critically ill or injured and could no longer contribute to running the business. If the partner is more than a capital investor, and their expertise is needed each day, then the business should plan for the loss of that person due to disability or critical illness. These policies can also be owned by the business. In some cases, like Business Overhead Expense insurance, the premiums can be tax deductible for the business also.
If you are looking for ways to protect your business interests and would like to speak with us, please feel free to contact Life Guard Insurance.
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