Corporate-Owned Life Insurance · Ottawa
Life insurance with a defined purpose for your company.
A corporation may own life insurance to help fund key-person loss, business debt, a share purchase or succession after an insured person’s death. Plan the owner, beneficiary and use of the proceeds together.
How ownership works
How a company-owned policy works.
- 01
The corporation owns the policy
- 02
The corporation pays the premiums
- 03
The selected individual is the insured person
- 04
The corporation is the beneficiary
- 05
The corporation receives and controls the insurance proceeds
This is a typical arrangement. A collateral assignment can give a lender priority. Corporate proceeds do not automatically become the family’s personal funds.
Corporate insurance may not be appropriate if the premiums would weaken essential cash reserves, interfere with business operations or address a need that could be handled more effectively through another strategy.
What the proceeds may support
Protect against the loss of a key person
Proceeds may help replace lost revenue, recruit a successor, retain employees and support the company while responsibilities are transferred.
Fund a shareholder agreement
Insurance may provide money to purchase or redeem a deceased shareholder’s interest. The policy structure must align with a properly drafted shareholder or buy-sell agreement.
Repay business debts
Coverage may help repay commercial loans, lines of credit, equipment financing or other obligations. When a policy is assigned to a lender, the lender may have priority over some or all of the proceeds.
Support business succession
Insurance can provide liquidity for an ownership transition, preserve working capital and help balance inheritances between family members who will and will not participate in the business.
Address estate obligations
The death of a shareholder may create tax, estate and liquidity requirements. Insurance may provide funds to help address these obligations without forcing an immediate sale of business assets.
A shareholder agreement establishes rights, valuation and purchase obligations. The insurance funds the agreed transaction; it does not replace that legal work.
Decisions to make with your advisors
Resolve the structure before applying.
Choose the amount and duration around the financial obligation and your reserves. Term may fit a temporary need; permanent coverage may fit a lifelong need but generally carries higher initial premiums.
Who should own the policy?
The operating company is not always the most appropriate owner. Depending on the business structure, the policy might be owned by the operating company, a holding company, another related corporation, individual shareholders or another legally permitted owner.
The decision may affect creditor exposure, control of the policy, access to its values, the sale of the business and the tax treatment of the proceeds.
Transferring an existing policy between a shareholder and corporation or between related corporations can create tax consequences. Ownership should be evaluated before the application is submitted.
Who should receive the benefit?
The beneficiary should be selected according to the purpose of the coverage. The corporation commonly receives the proceeds, but a lender may have priority when the policy is assigned as collateral.
Corporate insurance proceeds do not automatically become the personal property of the shareholder’s family.
How does the capital dividend account apply?
When a private corporation receives life insurance proceeds, part of the benefit may increase its capital dividend account, commonly called the CDA.
The potential CDA credit is generally based on the death benefit received minus the policy’s adjusted cost basis immediately before death. The adjusted cost basis changes over time and is not necessarily equal to the premiums paid or the cash surrender value.
The corporation’s accountant must confirm the available CDA balance, permitted distribution, required election and applicable tax treatment.
Are the premiums deductible?
Corporate-paid life insurance premiums are generally not deductible. A limited exception may apply when a policy is assigned as collateral for a qualifying business loan and specific tax requirements are satisfied.
Can the corporation access the policy’s value?
A permanent policy may allow access through withdrawals, policy loans, surrender or borrowing secured by the policy.
These transactions may create taxable policy gains, interest expenses, reduced policy values, a lower death benefit, a reduced future CDA credit or loss of coverage.
Taking money from the policy does not automatically allow the shareholder to receive it personally without tax consequences. Insurance, accounting and legal advice should be obtained before policy values are accessed.
Include expected profit loss, recruitment and transition costs, debt, the shareholder’s interest and estate liquidity when estimating the amount. Compare the result with existing cover and reserves.
Questions before you decide
Look closely at the details.
Can my corporation own life insurance on me?
A corporation may apply to insure a shareholder, executive or other person when the applicable insurable-interest and underwriting requirements are satisfied.
Are life insurance proceeds taxable to the corporation?
Life insurance proceeds received by a corporate beneficiary as a consequence of death are generally received tax-free. The amount that may be credited to the CDA is calculated separately and may be lower than the total benefit.
What happens if the business is sold?
The policy may be retained, transferred, surrendered or included in the transaction. Each option may have legal and tax consequences, so the policy should be addressed early in the sale process.
Review with Centerpointe
Coordinate the company, policy and estate plans.
We’ll review the business need, estimate the amount and duration, and coordinate the proposed owner and beneficiary with your accountant and lawyer. If you proceed, we support the application. Review the arrangement when shareholders, business value, debt, the insured person’s role, corporate structure or succession plans change.
Corporate-Owned Life Insurance Areas We Serve
Corporate-Owned Life Insurance guidance in Ottawa and neighbouring Eastern Ontario communities.
This page provides general educational information and does not constitute insurance, investment, legal, accounting or tax advice.
Corporate-owned life insurance involves legal, tax and financial considerations. Outcomes depend on the policy, adjusted cost basis, corporate structure, beneficiary designation, shareholder circumstances and legislation in effect at the relevant time.
References to tax-free insurance proceeds, the capital dividend account or capital dividends do not guarantee a particular tax result.
Accessing, transferring or surrendering a policy may create taxes, interest costs, reduced benefits or termination of coverage. Insurance is subject to eligibility, underwriting, exclusions, policy terms and approval by the issuing insurer.
Business owners should obtain independent legal and tax advice before implementing, changing, transferring or accessing a corporate-owned life insurance policy.