Are you a business or dental/medical practice owner seeking to proactively build wealth, grow your savings, reduce your tax rate, plan for succession, and leverage your assets? If so, corporate-owned life insurance is a tool you need in your wealth management and insurance planning toolkit.
Below, we provide an overview of corporate-owned life insurance and how you can use it to grow your practice, maximize your wealth, and reach your personal and professional goals sooner.
What is Corporate-Owned Life Insurance, and Why Do You Need It?
Like personal life insurance, company-owned life insurance helps cover costs in the event of your death and should be part of your wealth management strategies. Typically, a well-structured policy will cover any outstanding loans, ongoing business expenses, taxes, and more.
Corporate-owned life insurance policies help ensure that the operations of your business, dental practice or medical practice can continue with minimal interruption to your patients, customers, and staff. In addition, the coverage provides funds to the deceased’s beneficiaries. Savvy owners can also utilize corporate-owned life insurance while they are alive, particularly to leverage the company’s assets, maintain savings, reduce corporate taxes, and preserve their wealth.
How to Use Corporate-Owned Life Insurance?
From distributing your assets equally to optimizing tax efficiency to rewarding your best employees, there are multiple ways to make the most of your corporate-owned life insurance policy. We provide an overview of each below.
1) Tax Efficiency
When leveraged correctly, life insurance held by a corporation opens doors for multiple tax efficiency strategies including tax-free growth and corporate taxes minimization. For example, why use your personal, after-tax dollars when you can pay the premiums for your corporate-owned policy with dollars taxed at a lower rate instead? Would you also prefer to take advantage of tax-deferred investment strategies and have your beneficiaries receive a tax-free payout? If so, a corporate-owned life insurance policy may be right for you.
2) Estate Equalization
If you are like most business or practice owners, you have several beneficiaries in your estate plan. Naturally, some of them may have expressed interest in inheriting your business, while others have no desire to get involved. So, how do you divide your assets equally? A corporate-owned life insurance policy can help. This is because it allows you to pass on your business to one or multiple beneficiaries while ensuring all others receive the equivalent cash value.
3) Buy-sell Agreement
Buying or selling a share of your business is easiest for all parties when you clearly outline arrangements in your corporate-owned life insurance policy. Regardless of how you choose to structure your buy-sell agreement with your business partner(s), your insurance payout can fund it (instead of relying on personal or business assets to settle joint affairs).
4) Key Person Life Insurance
Could your business continue operations if you or another vital team member could not perform critical tasks? For most practice owners, their death or disability would cause significant disruption. For this reason, many opt to include key person life insurance in their policy to ensure the business receives monetary support during personnel or ownership transitions.
5) Employee Retention and Acquisition
Do you want to attract or retain key employees who add value to your business? Consider utilizing a corporate-owned life insurance policy as an attractive compensation tool. Many employees value the option to have their bonuses applied toward a permanent life insurance policy, giving them access to a death benefit and cash value of the policy.
Term Versus Permanent Life Insurance
There are two types of corporate-owned life insurance: term life insurance and permanent life insurance. The type and amount of coverage you need will depend on the stage of your business or practice, as well as your personal preferences and the goals you are working to achieve.
Term Life Insurance
Term life insurance provides temporary protection for a specific period of time (typically in five, 10, or 20-year terms). It is generally the most affordable option, making it attractive to new business and practice owners working on establishing themselves. It is very effective for ensuring your start-up costs and ongoing business expenses are taken care of in the event of your death through a one-time, tax-free payment.
Permanent Life Insurance
Permanent life insurance offers long-term, lifetime protection and allows you to build wealth within your policy. Within limits, you can access assets in your permanent life insurance policy when you are alive. This type of coverage also allows you to increase cash flow, fund a buyout agreement, and put plans in place for succession. In addition, your policy offers a savings component and helps ensure your business or practice has a reserve of funds not needed for daily operations.
Can Your Company Pay for Your Life Insurance?
Yes, your company can pay for your life insurance. In a corporate-owned life insurance scenario, your corporation purchases a permanent life insurance policy on you and pays the premiums. As the owner and beneficiary of the insurance policy, your enterprise retains all rights to the benefits under the policy, including the cash value accumulation and death benefit.
When purchasing a life insurance policy, it will be up to you to decide whether you want to own it as a corporation or personally. Which option you choose is really a matter of personal preference that takes into account your unique needs and goals. While there are tax advantages to owning the policy within a corporation, there are also other things to consider. Therefore, it may be worthwhile to speak with a strategic wealth management advisor who can take into account your needs and overall wealth management plan before confirming your insurance arrangements.
Final Thoughts on Corporate-Owned Life Insurance
Whether you are a new business owner or considering retirement, professional life insurance is an integral part of prudent and intelligent practice management. The type of corporate-owned life insurance you choose (term versus permanent), the amount of coverage you arrange, and how you choose to leverage your policy will vary based on the size and complexity of your practice as well as your unique circumstances.
As there are multiple considerations and intricacies related to insurance planning, always speak to an advisor who can offer you an integrated approach to wealth planning.
At The St-Georges Group, we know that it’s important for you to grow your business and reach your goals faster. We also know that insurance planning is a proven tax-saving strategy for dentists, healthcare professionals, and entrepreneurs.
As wealth management experts, we can help you grow your wealth through insurance planning, but also other effective strategies such as estate planning, tax planning, investment planning, and more. Request a free 30-minute consultation with one of our advisors today and we can answer all your questions about professional life insurance.