Corporate owned life insurance is a life insurance policy owned by a corporation. The corporation pays the premiums and receives the death benefit when the insured person dies.
It is often used by incorporated business owners to protect the company, fund a buy sell agreement, repay debt or create liquidity for estate and succession needs.
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How Does Corporate Owned Life Insurance Work?
A corporation buys a policy on the life of an owner, shareholder, key employee or executive.
The corporation is usually:
- The policy owner
- The premium payer
- The policy beneficiary
If the insured person dies, the insurer pays the death benefit to the corporation.
The corporation can use the proceeds to cover operating costs, repay debt, replace a key employee, buy shares from the deceased shareholder’s estate or fund a shareholder buyout.
Corporate owned life insurance can form part of a broader business owner wealth strategy.
Is Corporate Owned Life Insurance Tax Deductible?
Usually, no.
Life insurance premiums paid by a corporation are generally not deductible as a business expense.
An exception may apply if the policy is assigned to a lender as collateral for a business loan and specific tax requirements are met. In that case, part of the premium may be deductible.
The usual tax consideration is not the premium. It is the treatment of the death benefit after the insured person dies.
What Is the Capital Dividend Account?
The Capital Dividend Account is a tax account available to eligible Canadian private corporations.
When a corporation receives a life insurance death benefit, the amount of the death benefit less the policy’s adjusted cost basis may be added to the Capital Dividend Account.
The corporation may then pay a capital dividend to Canadian resident shareholders. A properly elected capital dividend is generally tax free to those shareholders.
This can give a corporation a way to move life insurance proceeds to shareholders or the estate without treating the full amount as a regular taxable dividend.
What Is Adjusted Cost Basis?
Adjusted cost basis, often shortened to ACB, is a tax value attached to a life insurance policy.
It is not the policy’s cash value. It is not the death benefit. It is a separate amount used for tax calculations.
For corporate owned life insurance, the available Capital Dividend Account credit is generally based on:
Death benefit − Adjusted cost basis
If the policy has a lower ACB when the insured person dies, the corporation may receive a larger Capital Dividend Account credit.
ACB can be difficult to calculate. It should be reviewed with the corporation’s accountant and insurance advisor.
Why Do Business Owners Use Corporate Owned Life Insurance?
Business continuity
The death benefit can provide the company with cash after the death of an owner or key employee.
That money may cover operating costs, replacement hiring, lost revenue or debt obligations.
Key person protection
A company may insure a person whose knowledge, relationships, sales ability or leadership is important to the business.
This is commonly called key person insurance.
Buy sell agreement funding
A buy sell agreement sets out what happens to a shareholder’s ownership interest after death, disability, retirement or another triggering event.
Life insurance can provide the cash needed for surviving shareholders to buy the deceased shareholder’s shares from their estate.
Corporate debt protection
Some lenders require life insurance as collateral for business financing. The death benefit may help repay a corporate loan if an owner dies.
Estate liquidity
A corporation may receive the death benefit after an owner dies. The funds can help with a share redemption, corporate taxes, estate obligations or a planned business transition.
Capital Dividend Account planning
The policy’s death benefit may create a Capital Dividend Account credit. This can allow eligible private corporations to pay tax free capital dividends to Canadian resident shareholders.
Who Should Consider Corporate Owned Life Insurance?
Corporate owned life insurance may be worth reviewing if you are:
- An incorporated business owner
- A shareholder in a private corporation
- A doctor, dentist, lawyer, consultant or other incorporated professional
- A business owner with retained earnings inside a corporation
- A shareholder with a buy sell agreement
- A business owner with corporate debt or personal guarantees
- A company that relies heavily on one owner or key employee
- A business owner preparing for succession or estate planning
The policy needs a clear purpose. It should match the shareholder agreement, corporate structure, cash flow, tax position and estate plan.
Corporate Owned vs Personally Owned Life Insurance
| Factor | Corporate Owned Life Insurance | Personally Owned Life Insurance |
| Policy owner | Corporation | Individual |
| Premium payer | Corporation | Individual |
| Typical beneficiary | Corporation | Family member, trust or another named beneficiary |
| Premiums deductible? | Usually no | Usually no |
| Death benefit recipient | Corporation | Named beneficiary |
| Capital Dividend Account credit | May apply to eligible private corporations | Does not apply |
| Common purpose | Business continuity, debt protection, shareholder buyouts and succession | Income replacement, family protection and personal estate needs |
Personally owned insurance is often a better fit when the main goal is to replace family income, cover personal debt or leave money directly to a spouse or children.
Corporate ownership may be more suitable when the main purpose is protecting the company or funding a shareholder agreement.
Term life insurance can suit a defined need over a fixed period. A business may use it for a loan, key person coverage or a buy sell agreement.
Whole life insurance and universal life insurance are permanent policies. They may be considered for longer term corporate succession, estate or wealth transfer needs.
What Are the Drawbacks?
Corporate owned life insurance requires careful planning.
Consider these factors before buying a policy:
- Premiums are usually not deductible.
- The corporation needs reliable cash flow to pay premiums.
- Permanent insurance usually costs more than term insurance.
- The policy can complicate a future business sale or shareholder change.
- A policy transfer between a shareholder and corporation can create tax consequences.
- Capital Dividend Account elections need to be completed correctly.
- The policy should be coordinated with shareholder agreements, wills and succession plans.
- Policy loans, withdrawals and cash value may have tax consequences.
- The strategy may not suit a business with unstable cash flow.
- Corporate owned policies do not automatically have the same creditor protection that may be available to personally owned life insurance with properly designated beneficiaries.
