Life Insurance for Business Owners: Term, Whole, and Corporate-Owned
Which life insurance is right for your business? Learn the differences between term, whole, and universal life, plus when corporate ownership makes sense.
- Term insurance: Affordable, temporary coverage for specific needs
- Whole life: Permanent coverage with cash value accumulation
- Corporate-owned policies offer unique tax advantages
- Death benefit creates Capital Dividend Account (CDA) for tax-free distribution
- Match your insurance to your business succession plan
Why Business Owners Need Life Insurance
As a business owner, life insurance isn't just about your family. It's about:
- Funding buy-sell agreements with partners
- Paying the tax bill when you die
- Key person protection
- Collateral for business loans
- Retirement income supplement
Types of Life Insurance
What it is: Coverage for a specific period (10, 20, 30 years)
- Lowest cost per dollar of coverage
- No cash value accumulation
- Premiums increase at renewal
- Good for temporary needs (mortgage, young children)
- May be convertible to permanent insurance
What it is: Permanent coverage for your entire life
- Fixed premiums that never increase
- Cash value grows tax-sheltered
- Can borrow against cash value
- More expensive than term (but covers forever)
- Dividends may be paid (participating policies)
What it is: Permanent coverage with investment component
- Flexible premiums (within limits)
- Cash value invests in various options
- More complex than whole life
- Good for sophisticated investors wanting tax-sheltered growth
Corporate-Owned Life Insurance
When your corporation owns the policy on your life, unique tax advantages arise.
- Corporation is owner and beneficiary
- Corporation pays premiums (using corporate dollars)
- Premiums are NOT deductible (but paid with after-tax corporate income)
- At death: Proceeds received tax-free by corporation
- Proceeds (less ACB) credit to Capital Dividend Account
- CDA allows tax-free dividends to shareholders
Corporate-Owned Insurance Tax Advantage
- Policy death benefit: $1,000,000
- Adjusted Cost Base (ACB): $100,000
- Addition to CDA: $900,000
- Estate can receive $900,000 as tax-free capital dividend
- This $900,000 funds the tax bill on deemed disposition of shares
Personal vs Corporate Ownership
- Need for family protection (not business)
- Corporation has passive income issues
- Want personal creditor protection
- Simple beneficiary needs
- Funding shareholder buy-sell agreement
- Key person insurance
- Estate tax funding (using CDA)
- Surplus cash in corporation
- Want to pay premiums with after-tax corporate dollars (~12%) vs personal dollars (~50%)
Common Business Insurance Strategies
Partners insure each other. At death, proceeds fund purchase of deceased's shares.
Protect against loss of critical employee. Proceeds help business survive transition.
Bank requires coverage equal to loan. If you die, loan is paid off.
Need Help With Business Insurance Planning?
Tax Punjabi works with insurance professionals to ensure your coverage matches your tax and succession plan.
This article is for educational purposes only. Insurance needs are individual - consult professionals for your specific situation.