Key Person Insurance
Business owners and other key executives spend considerable
time and effort to acquire the knowledge, experience, judgement,
reputation, relationships and skills that make them valuable to
the business. When they die, the business loses a key member
of the management team and this can have a severe financial
During the disruption that follows the death of a key player,
lenders may cut back credit, creditors may press for immediate
payment, debtors may delay making payments, employees and
customers may lose confidence, and competitors make take
advantage of the situation. Larger corporations are often in a
much better position to prepare for key executive turnover
because of sheer size and numbers. For smaller businesses
finding an immediate replacement with the same qualifications as
the deceased owner or executive is much more difficult. In the
absence of proper planning, the very survival of the business
may be affected by the death of a business owner or a key
The impact of this situation can be considerably reduced if the
business has purchased an insurance policy on the life of the
owner and/or key executive. If they die, the life insurance
proceeds give the business working capital to meet immediate
cash needs and provide a source of funds for finding, attracting,
hiring and training a replacement for the deceased executive, or
to hire interim management.

Business Loan Protection
It can be difficult to obtain adequate debt financing for a small
business. Creditors will often require the business owner to
personally guarantee a loan. The death of the business owner or
another key executive may cause creditors to demand immediate
repayment of outstanding business debts. This can place a
significant burden on the business and force the liquidation of
key business assets at fire sale prices at a time when business
results may already be severely impacted by the death. In
addition, if the business owner has personally guaranteed the
debts incurred by the business, the owner, or the owner's estate
may be liable for any outstanding debts that the business is
unable to pay.
A solution is for the business to buy an insurance policy on the
life of the business owner(s) or other key executives. Proceeds
from the life insurance policy are tax-free and may be used to
pay down the outstanding business debt. A creditor may require
a small business to purchase collateral life insurance to protect
the creditor's interests, particularly if the death of the business
owner could affect the value of business assets used to secure
the debt. In other cases, the business owner may simply want to
ensure that business debts will be fully repaid if he or she dies to
minimize financial risks for heirs and to permit the business to
continue free of debt.
Generally, life insurance premiums paid for business loan
protection are not deductible for tax purposes. However, if a life
insurance policy has been collaterally assigned to a restricted
financial institution, a portion of the premiums may be deductible.

Buy-sell Funding
A key component of an integrated financial plan is planning for
business succession. An integral part of any succession plan is
to ensure that financing is in place to fund the purchase and sale
of the business interest if an owner dies. Life insurance is
generally an efficient way to fund the obligation that results from
a buy-sell agreement when a shareholder or partner dies. An
important consideration is whether to fund the buy-sell
arrangement with corporate owned or personally owned life
insurance. Ensuring that the ownership is properly arranged
from the onset will avoid a transfer of ownership of the insurance
policy in the future, which would result in a disposition of the
policy and could possibly trigger a tax liability.

Funding Capital Gains Tax on a Business at Death
An individual who owns shares in a corporation, a partnership
interest, or business assets (as in the case of a sole
proprietorship) will be deemed to have disposed of these
properties at death. As a result a tax liability may arise in the
form of capital gains and recaptured capital cost allowance. If
funds or other assets are not available to pay the tax liability, the
shares or partnership interest may have to be sold, or business
assets may have to be liquidated, possibly for a price below the
fair market value. Life insurance can provide the funds needed
to pay the tax liability that results from the capital gains and
recaptured depreciation triggered by an individual's death. The
individual could own the life insurance policy, or it could be
owned by the corporation or partnership and dispersed to the
individual's estate after death.

Split Dollar Life Insurance
Life insurance's versatility makes it an excellent choice for
meeting a dual need experienced by many small businesses. It's
common for one party within a business to need the financial
protection that life insurance provides against death, either
their's or someone else's within the company, while another
person needs a tax-sheltered investment vehicle. In these
arrangements, one party typically owns and pays for a level
death benefit portion of the policy and the other party owns and
funds the remaining interests in the policy (generally the cash

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 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 tax-deferred 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, the policy's cash
surrender value can be accessed through withdrawals or a
collateral loan secured against the insurance policy.

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