Life insurance is more than a death benefit Iqaluit NU
Life insurance is more than a death benefit
(NC)-Life insurance is one of those unselfish things we buy. Whether whole life or some form of term plan, it can help our family with expenses when we pass on and replace our income, at least temporarily.
Life insurance has a place in business, too. "If you have partners, you should carry it as a matter of goodwill for the families," says Gary Marcus, CA and partner at Horwath Orenstein LLP in Toronto. "But your business may need insurance on your life to secure bank financing, too."
"In smaller companies, especially partnerships, the company can hold life insurance policies on each of the principals," Marcus explains. "Insurance is often tax free, and can be redeemed as a capital dividend, not capital gains."
Another benefit is that the company can purchase insurance with pre-tax dollars, a substantial saving compared to what an individual would have to pay. Sometimes, the company can even take over a policy that its owner has already established, paying the full value of the policy to him or her - tax-free.
"In a small business, life insurance is really key-person insurance," says Steven Aprile, CA and partner at PKF Hill LLP in Toronto. "If the company couldn't continue without that key person, a policy on his or her life can protect it against financial hardship." He explains that the death benefit can give the company's survivors options too, enabling them to buy out the deceased's interest in the business so they can continue to operate it independently.
"In a family business, life insurance can be even more important. Not only will it protect the family financially should the breadwinner die," Aprile says, "but it can be a way to keep the business in the family itself.
"If the business is being passed to the next generation rather than a spouse, there can sometimes be a deemed disposition of the assets, and significant taxes may be payable." Aprile explains that a life insurance policy can provide the heirs with money to pay the taxes owing, allowing them to retain the business if they don't want to liquidate it.
"There are three or four main kinds of life insurance," says Marcus. "Term insurance - the kind banks often require - has a premium that's subject to change according to an established schedule, either annually or when the policy is renewed after 10 or 20 years." Whole life or permanent insurance fixes the premium at the rate that's in effect when you buy it. Universal life is usually a customizable kind of whole-life insurance/investment policy. Additional premiums go into an investment account where they grow tax-free. On death, the investment is paid out tax-free along with the insurance itself.
Whatever the form, it's just good business - and good sense - to have life insurance. To find the plan that makes the most sense for you, your business and your family, you can talk to a Chartered Accountant.