Business Insurance

Retirement Income Planning with Corporations

There are many retirement planning opportunities that are available to individuals who own their own corporations.  Two examples of these are a Corporate Insured Retirement Plan and an Estate Bond.

Corporate Insured Retirement Plan

The Corporate Insured Retirement Plan helps business owners protect the financial interests of their businesses while giving them an opportunity to access cash in a tax-effective manner during their lifetime.

How it works

A corporation owns, pays premiums for, and is the beneficiary of a tax-exempt life insurance policy on the life of a shareholder. During the accumulation period, the corporation makes payments into the policy that create significant policy cash values.  Due to the exempt status of the policy, any policy earnings will be exempt from income tax.  In the future, when the individual wants to access the cash value of the life insurance policy, they can take out a series of personal loans from a third party financial institution.  The corporation assigns the policy to the financial institution as collateral security for the loans.  They would then pay the corporation a fee for the right to use its policy as security for the loan or they can include the value of that right as income.  The loan income would be received tax free.

At death, the tax-free death benefit first pays the outstanding loan plus accumulated interest.  The corporation may post the entire death benefit to its capital dividend account (CDA), minus an amount equal to the policy’s adjusted cost basis.  An amount equal to the CDA can be paid to the shareholder’s estate as a tax-free capital dividend.  Any amount remaining can be paid as a taxable dividend.

Estate Bond

An Estate Bond is a strategy that can be used for individuals who are accumulating assets within a corporation and do not intend to use them in their lifetime.  This strategy will maximize the growth and tax efficiencies of those assets for the next generation(s).

How it Works

The individual will have accumulated assets within their corporation.  Those assets, as non-operating income, will be fully taxable investments.  Once they have determined that those investments will not be needed in their lifetime, the goal will be to maximize those assets.

The corporation will purchase a permanent life insurance policy on the life of the individual.  The death benefit will immediately increase the value of the estate and as that policy continues on, the growth of the death benefit is tax free.  Eventually when the individual dies, the death benefit is paid out to the corporation, again on a tax free basis.  This payment of the death benefit creates a credit in the corporate Capital Dividend Account, if available, which allows part or all of the death benefit to be paid to the estate tax free.  Any cash in excess of the CDA balance is paid to the estate as a taxable dividend.

Key Man Insurance

When a business loses a key person, several things can happen. First and foremost, the business is disrupted as the owners try to assess what has happened and develop a plan of action. This disruption usually causes a drop in sales as the business focus is diffused. As well, sales that have already been made may not be deliverable or may be questionable, causing clients to go elsewhere. Finally, even if the business is able to survive all these factors, it still must replace the skills that were lost, if possible.

Fortunately, the possibility of death or disability of a key person is a contingency that can be insured. Businesses can purchase corporate-owned life insurance on the lives of their key people. If one of these key people dies, the business receives a tax-free death benefit which it can use to meet expenses and repay any debts. The money can also be used as a reserve against the drop in revenue that may occur while the company goes through a period of transition.

Disability insurance is also available on key people. The company owns the plan and is the beneficiary of the proceeds. The proceeds, of course, can be used for all the same purposes as proceeds from life insurance plans. The only difference is that the disability insurance proceeds cannot be paid out as tax-free dividends to the owners of the business, nor can they be paid tax-free to disabled employees.