As a high-net-worth Canadian business owner, protecting your company while ensuring personal financial stability is crucial. Shared ownership of a Critical Illness Insurance policy offers a unique solution to achieve these goals. In this guide, we’ll break down how this strategy works, its benefits, and why it could be the right choice for you.
Shared ownership of Critical Illness Insurance is a strategic solution that combines financial security for your business with tax-efficient personal benefits.
What is Shared Ownership Critical Illness Insurance?
The Breakdown of Shared Ownership CI
Shared ownership means two parties share ownership of an asset, dividing costs and benefits. For a Critical Illness Insurance policy, this involves:
- Critical Illness Benefit: One party pays premiums for coverage that provides a lump sum if a covered illness occurs.
- Return of Premium (ROP) Benefit: Another party pays for the benefit that refunds premiums if no claim is made.
This arrangement allows businesses and owners to share costs while maximizing benefits efficiently.
The Problem: Tax Challenges and Business Risks
Imagine you’re the CEO of XYZBusiness.ca, a successful company. At 45, your leadership is vital to operations and growth. But life’s unpredictability, such as a heart attack or stroke, poses significant risks. Additionally, high taxes complicate your ability to extract compensation effectively from your corporation.
Key Challenges:
- Business Continuity Risks: A major illness could halt operations, reduce revenue, and threaten stability.
- Tax-Efficient Compensation: With RRSP, TFSA, and pension plans maxed out, alternative solutions for tax-efficient savings are necessary.
The Solution: A Shared Ownership CI Approach
How Shared Ownership Works
In this arrangement:
- Your business, XYZBusiness.ca, covers premiums for the critical illness benefit.
- You, as the owner, fund the ROP benefit.
- Both parties jointly own the policy and share its advantages.
Practical Example:
- Policy Details: $250,000 Term 10 Critical Illness Insurance with ROP after 15 years.
- Annual Premiums:
| Period | Paid by XYZBusiness.ca | Paid by You |
|---|---|---|
| First 10 years | $1,813 | $2,145 |
| Next 10 years | $4,955 | $4,903 |
Benefits of Shared Ownership
If a Critical Illness Occurs:
- A tax-free $250,000 payout is made to XYZBusiness.ca.
- Funds can replace lost revenue, cover debt, or hire temporary leadership.
If No Critical Illness Occurs:
- On or after the 15th policy anniversary, the policy may be canceled.
- You receive a return of premiums totaling $138,150, which can enhance retirement savings.
Tax and Legal Considerations
- Tax Treatment: Critical illness payouts are generally tax-free, but ROP benefits may incur taxes.
- Ownership Transfer: Transferring policy ownership from XYZBusiness.ca to you upon departure could trigger taxable benefits.
- Seek Professional Advice: Consult with legal and tax experts to structure agreements properly. Thorough Wealth's consultants can assist you in making an informed decision that provides protection for your business while maximizing your after-tax personal compensation.
Frequently Asked Questions
1. What is shared ownership of a Critical Illness Insurance policy?
It’s a private arrangement between two parties, dividing the costs and benefits of the policy.
2. How does shared ownership CI benefit business owners?
This strategy protects your company while offering a tax-efficient way to enhance your personal compensation.
3. What happens if a critical illness occurs while my Shared Ownership CI policy is in place?
A tax-free benefit is paid to the company, helping mitigate financial disruptions, and the policy terminates.
4. What if no critical illness occurs while my Shared Ownership CI policy is in place?
Premiums are refunded to you, subject to potential taxes, providing additional funds for retirement.
5. Can the owner retain the Shared Ownership CI policy after leaving the company?
Yes, but transferring ownership may result in taxable benefits based on the policy’s market value.
Shared ownership of Critical Illness Insurance is a forward-thinking strategy for balancing business protection with personal financial planning. By aligning your goals, this approach can help you secure your future with confidence and efficiency.