Corporate-Owned Life Insurance (COLI) has two major types of life insurance: Permanent and Term Life Insurance. The two types of Corporate Owned Life Insurance are for different corporate purposes and financial goals.

According to an article by Andrew Feindel for The Globe and Mail, titled “How owning insurance in a corporation can address changes to the capital gains inclusion rate” corporate-owned permanent life insurance helps in building wealth and estate planning.

Overall, the Canadian life and non-life insurance market is forecasted at $143.74 billion by 2029. That is indeed pretty lucrative. Let’s delve deeper into the types of company-owned life insurance:

Term life insurance policies

This policy pays for a specified term, say, 10, 20, or 30 years. If the employee dies, the business is paid the death benefit. Term life is typically lower in cost than coverage for life. However, it won’t build cash.

Permanent life insurance policies

Just like the name suggests, this policy is permanent in its coverage. Additionally, it includes a cash value component, which is earned over time. The cash values are corporate assets, serving as a source of liquidity for corporate purposes.

A permanent life insurance policy is typically more expensive than a term policy. That’s because it includes other financial advantages, such as cash growth.

Corporate-Owned Life Insurance works by identifying key employees as a starting point. Corporate-Owned Life Insurance policies work when firms pay life insurance premiums.

As per an article by Joelle Hall in Financial Post, titled “From liability to asset: Tapping the potential of insurance to maximize wealth,” life insurance for key people is a great way for Canadian business owners to mitigate risk. Take a look at how the policy actually operates:

1. Policy Buying: The organization purchases ownership of life insurance for major employees. This includes managers or critical-skilled workers. The firm keeps these policies in its possession and pays for them.
2. Notice and Consent: The employee is given notice in advance of the policy issue of the intent to insure his/her life. The amount of maximum coverage is also disclosed. The employee then provides written consent, assuring his/her agreement on the arrangement.
3. Cash Value and Premium Payments: After that, the company makes policy premium payments. They can be structured so that the policy cash value is built over time.
4. Cash Value Application: Please note that the cash value can be withdrawn or borrowed by the business. It’s usually done for financing employee benefits, compensation, or other business costs.
5. Death Benefit: In the event of an employee’s death, the company receives the policy’s death benefit. These life insurance proceeds then go tax-free.

The proceeds can be used for the following needs:

•  Reimbursement of financial losses
• For hiring and training a new employee
• For other corporate obligations

The policy transactions must be handled carefully since they can reduce the policy’s death benefit. Moreover, they also have tax implications. With the guidance of IBC Financial experts, risk management is more accessible than ever.

The tax benefits of corporate-owned life insurance are tax-deferred growth of cash values. Another one of the tax advantages of COLI is the tax-free business death proceeds. According to an article by LifeBuzz.ca, titled “Corporate-Owned Life Insurance in Canada,” tax-deferred growth supplements corporate retained earnings.

Also, there’s cost-effective financing of employee benefit costs. In addition, it creates tax-helpful active business income. It delivers tax-free capital dividend distributions. They can enhance corporate financial planning and asset aggregation strategies.

Corporate-Owned Life Insurance is advantageous in various ways for private corporations. The key advantages of Corporate-Owned Life Insurance include business continuity in the event of the loss of a major employee.

According to an article by Roxanne Arnal for Eye Care Business Canada, titled “6 Reasons to Consider Business-Owned Life Insurance as an Investment,” these policies allow business owners to leverage life insurance as an investment component.

Since the policy cash value is tax-deferred, it can be used for various corporate purposes. Take a look at the major pros:

Reduced tax cost of life insurance premiums

It is tax-efficient since it allows businesses to finance the insurance premium in pre tax dollars. That, in turn, keeps the total tax expenses minimal. The cash value of a policy is also tax-deferred.

Also, the proceeds over the deceased shareholder or employee typically pass tax-free. Thus, COLI is a cost-effective vehicle for financing employee benefit expenses.

Equitable distribution of premium payments

The equitable division of premiums in COLI allows for a balanced spread of costs among stakeholders. Allocations can be made based on:

1. A role
2. Salary structure
3. Or benefit contribution

This keeps costs in balance and achieves maximum tax savings. It also aids cost-effective financing of benefits for key executives.

Control of premium payments

The payment of premiums is managed by the corporate owner. It also decides on payment periods and modes. The premiums can thus be tailored for tax optimization and cash flow planning. With sufficient planning, COLI can continue to be a corporate asset for corporate benefits.

Streamlined management

It also simplifies management by providing tax-advantageous cash growth. COLI funds executive compensation and business continuation planning.

Thus keeping financial security intact and risk in check. Overall, it improves efficiency by providing streamlined corporate asset planning. For more on this, contact IBC Financial’s team of insurance advisors.

he disadvantages of corporate-owned life insurance include high costs. Another disadvantage of corporate-owned life insurance is the ethical considerations.

According to an article by Ashlyn Brooks in Bankrate, titled “Drawbacks of corporate-owned life insurance” COLI is also called “Dead Peasant Insurance” due to its historical use. That’s because it was purchased for low-wage workers without informing them, in the 1980’s.

Here are some drawbacks of COLI:

• Costly: Permanent COLI policies can be more expensive than individual policies.
• Tax Implications: Inappropriate structuring of COLI policies can lead to negative tax implications.
• Employee Relations: Unauthorized insuring of workers can pose ethical dilemmas. It may also appear as though the firm is making profits off employee deaths.
• Regulatory Compliance: The corporate-owned policies have stringent regulations. Thus necessitating careful observance of Canadian tax laws and reporting requirements.

The best practices for implementing COLI include policy alignment with corporate objectives. The best practice for implementing COLI is obtaining informed consent.

As per the report by M Benefit Solutions “A Primer on Corporate-Owned Life Insurance (COLI),” the firm must inform the employee in writing and seek consent.

Choosing the right insurance provider

To select the best corporate insurance company, look for the following aspects:

• Financial Stability and High Ratings
• Expertise in COLI
• Product Versatility
• Regulatory Compliance
• Competitive Pricing

Following these parameters can help your business achieve its strategic and financial objectives.

Structuring the policy effectively

To structure a Corporate-Owned Life Insurance policy well, it must be aligned with the business goals. It must also be well-funded for key stakeholders. Moreover, compliance with current tax regulations is a key requirement.

For a well-structured plan for maximum benefits, it’s best to rely on a financial advisor or tax advisor. IBC Financial has the best-in-class resources available, so get in touch now.