Life Insurance Solutions for Small Business Owners ---- Part III

Life Insurance Solutions for Small Business Owners

- Part III

from Manulife

Executive Compensation

Small business owners often offer supplementary benefit
packages to attract executives. These packages offer a
wide assortment of benefits, which may include life
insurance protection.

The life insurance protection ensures that if the executive
dies, his or her dependants receive money that can be used
to cover funeral expenses, education costs, reduce debt and provide future income.

The policy may be purchased by the business/employer, or it may be owned and funded jointly by the employer and the executive. The executive’s dependants would be named as
the beneficiary of all or a portion of the policy.

The employer paid portion of the life insurance premium must be reported as a taxable benefit to the executive. It is important that the amount reported represents a reasonable cost for the benefit received.

Wealth Creation

Often a business’s profits or surplus cash are invested in GICs or taxable investments. These taxable investments may not be the business’s best investment option. If the business already needs an exempt life insurance policy for key-person insurance, business loan protection or some other business insurance need, the policy could also be used as a vehicle for investing the company’s excess profits.

An exempt, permanent life insurance policy allows for taxdeferred growth of the cash value and tax-free receipt of the proceeds at death. The cash value growth within an exempt policy is not subject to annual accrual taxation and is only subject to tax if there is a disposition of the policy.

Significant cash value can accumulate on a tax-deferred basis if the business deposits the maximum amount permitted by the Income Tax Act into the exempt policy. The deposits can remain within the policy on a tax-sheltered basis and pay for the cost of insurance and expenses in future years.

If the corporation or shareholder needs access to the cash at some future date, the policy’s cash surrender value can be accessed through withdrawals or a collateral loan secured against the insurance policy. Policy withdrawals may trigger some income tax at the time of the withdrawal. Advances to the corporation received as a collateral loan will be tax free and if the proceeds are used to earn income from a business or property, and the other requirements of 20(1)(c) of the Act are met, the interest expense may be deductible for tax purposes.

Conclusion

Life insurance can be used to protect the interests of a small business owner and to ensure the continued operation of the business itself. It can provide security for creditors during a period of change and assurance that the business will continue even if a key person departs. It can also be
instrumental in attracting and retaining excellent employees, who will work to assure the continued success of the company.

As you work to develop an integrated financial plan, you will want to consider life insurance as a cost-effective solution for your current situation and as a means of achieving the stability that is so essential to your future success.

For information on how Manulife’s products can help meet your business needs, visit
www.manulife.ca/insurance.

for information on insurance and financial products, call us at 1-800-419-3723 or visit us at http://www.blueskyfinancialgroup.com/