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Life Insurance for Business Owners in Canada: A 2024 Guide
Life insurance is an invaluable asset for business owners. It can help ease financial concerns during their lifetime and after they pass away. A policy can be used to help cover taxes after death, to fund a buy-sell agreement, or as collateral for a loan to invest back in the business. The policy can be purchased for an individual owner or key employee, and the business can be named as the beneficiary to receive the death benefit payout.
- What is life insurance for business owners?
- Do business owners need life insurance?
- What are the benefits of life insurance for a business owner in Canada?
- What are the disadvantages of corporate-owned life insurance?
- What are the different types of life insurance business owners can buy?
- Life insurance strategies for business owners
- How can business owners save on taxes with life insurance?
- How to choose the best life insurance for small business owners?
- How to get life insurance if I’m a business owner?
- Frequently asked questions about life insurance for business owners
As a business owner, protecting your personal and business assets is essential. While many focus on insurance for property, liability, or employees, life insurance is often overlooked as a key part of a solid business protection plan.
Life insurance provides financial security for your family and ensures your business can continue to thrive if the unexpected happens. In this article, we’ll break down the unique benefits of life insurance for business owners in Canada.
What is life insurance for business owners?
For business owners, life insurance can be used to meet the financial needs of their business, instead of for strictly personal needs. It offers a reliable way to ensure the legacy you’ve worked hard to establish is protected for the future. A life insurance policy can be leveraged to:
- Ensure business continuity after the death of an owner
- Fund buy-sell agreements
- Secure business loans for expansion or other needs
- Insure against the risk of losing employees who are critical to business operations
- Settle liabilities if the business closes
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Do business owners need life insurance?
Can a business own a life insurance policy?
Yes, a business can own a life insurance policy. The business owner or even an important employee can be the covered person, as long as the business has an insurable interest in the individual getting coverage. This is usually called corporate-owned life insurance.
- The business pays premiums
- The business is the beneficiary and will receive the death benefit payout if the person passes away
- Tax-free funds can go into the business’ capital dividends account
When a business owns a policy, it can be called company-owned life insurance, corporate-owned life insurance (COLI), business-owned life insurance, or bank-owned life insurance (BOLI).
What are the benefits of life insurance for a business owner in Canada?
Business-owned life insurance can ensure business continuity in the unfortunate event of an owner’s passing along with offering tax benefits, added liquidity, and better policy management.
- Business continuity: Funds from a payout help to keep the business operational in the event of an owner’s death
- Succession planning: Funds can be used to buy out ownership from a deceased owner
- Tax advantages: Tax-free death benefit payouts, tax-free policy loans, and tax-deferred cash value growth, all help owners maximize tax efficiency
- Capital dividend account: Death benefit proceeds can go into a CDA account and be used to pay tax-free dividends to shareholders
- Access to liquidity: Whether through a death benefit, loan, cash value, or dividends, life insurance gives owners multiple ways to access liquidity for their needs
- Facilitating growth: Extra cash and collateral help secure loans or directly fund expansion
- Creditor protection: Death benefit proceeds can cover debts and satisfy creditors, preventing profits from being diminished
- Estate planning: Cover estate taxes and ensure the business and its assets can be passed on with minimal tax burden for heirs
- Streamlined policy management: Coordinate premium payments, update policies, or file claims from a single account
- Premium savings: Equitable sharing of premium payments and benefits through split-cost arrangements helps business owners pay reduced costs
- Premium write-offs: Life insurance premiums paid for by a corporation can be tax-deductible for group life insurance or when the policy is used as loan collateral
What are the disadvantages of corporate-owned life insurance?
Corporate-owned life insurance (COLI) can protect a business, but it also has key challenges. These include tax complexities, high costs, and potential complications in accessing funds or managing ownership changes.
- Tax and regulatory issues: Premiums are not tax-deductible, and improper structuring can result in tax liabilities or legal challenges
- High costs: Whole and universal life policies can be expensive, making them a significant financial commitment, especially for small businesses
- Liquidity and control challenges: Accessing cash value may involve penalties, and changes in ownership can complicate benefit management
What are the different types of life insurance business owners can buy?
Business owners can choose from different types of life insurance policies to meet their unique needs, ranging from short-term coverage to lifelong protection with investment options.
Term life insurance helps with temporary needs, offering affordable coverage for a set period while whole life insurance provides lifelong coverage with a savings component, making it suitable for long-term planning.
Universal life insurance offers both flexibility and investment growth potential, allowing business owners to adjust their coverage as their needs change.
Types of life insurance policies for business owners
| Type of life insurance | Overview | Best for… | Key benefit |
| Term life insurance | Coverage for a set period (10, 20, or 30 years) | Temporary needs like loans or key employees | Affordable and predictable premiums |
| Whole life insurance | Lifelong coverage with cash value growth | Long-term planning, succession, estate | Combines insurance with savings |
| Universal life insurance | Lifelong coverage with flexible premiums | Flexible needs and investment growth | Customizable coverage with investment options |
Life insurance strategies for businesses and owners
Life insurance can serve as a powerful tool for business owners, offering financial security and ensuring long-term stability.
From protecting against the loss of key employees to facilitating smooth ownership transitions and covering business debts, life insurance strategies help safeguard both personal and business interests.
| Life insurance strategy | Benefit to business owners |
| Key person insurance | Provides financial protection against the loss of a key employee or owner, ensuring business stability and continuity |
| Buy-sell agreements | Facilitates the smooth transfer of ownership by funding buyouts, protecting the business from disruptions |
| Business loan protection | Covers outstanding business loans, safeguarding personal assets and maintaining financial stability |
| Executive compensation | Enhances employee benefits, helping attract and retain top talent while offering financial security |
| Estate planning | Assists in transferring wealth and business assets efficiently, minimizing tax liabilities for heirs |
| Wealth accumulation | Builds cash value within a policy, providing liquidity for business opportunities or emergencies |
How can business owners use term life insurance for personal use?
Just like anyone else, a business owner can use a personal life insurance policy to protect their family’s future finances. Their surviving loved ones can use the death benefit to replace income, pay for their children’s education, etc.
Term life insurance helps business owners:
- Replace lost income and keep up with the everyday cost of living
- Cover personal debts like mortgages, car loans, credit card debt, or lines of credit
- Pay for children’s future education costs
- Bolster retirement income for a spouse or partner
- Pay for end-of-life expenses and funeral costs
Expert Tip
How can business owners use whole life insurance for personal use?
In addition to the benefits for their family after their death, a business owner can also use whole life insurance for financial benefits during their lifetime to supplement their retirement income, borrow against the policy, and access cash value for investments.
Whole life insurance helps business owners:
- Supplement retirement income
- Access cash surrender value for investments, unexpected expenses, or business needs
- Borrow against the policy or use it as collateral to secure a business loan
- Plan to cover future estate taxes or capital gains taxes for their loved ones
How can businesses save on taxes with life insurance?
By leveraging life insurance policies, business owners can benefit from tax-free death benefits, utilize cash value growth, and gain access to loans while reducing taxes.
Policies can also be used for tax-efficient estate planning, providing liquidity for business succession or debt repayment. Here are some key ways life insurance helps businesses save on taxes:
| Tax-saving strategies | How it helps |
| Tax-free death benefit | The death benefit payout is tax-free, providing financial protection without adding a tax burden |
| Capital dividend account (CDA) | Death benefit proceeds can be paid into a CDA, allowing tax-free dividends to shareholders |
| Cash value growth | The cash value in permanent life insurance grows tax-deferred, meaning you don’t pay taxes on the growth until it is accessed |
| Policy loans | Loans taken against the cash value of the policy are tax-free, providing liquidity without immediate tax consequences |
| Premium write-offs | Premiums for corporate-owned life insurance may be tax-deductible, reducing the taxable income of the business |
| Estate planning | Life insurance can cover estate taxes, ensuring the smooth transfer of assets to heirs without significant tax liability |
| Immediate financing arrangement (IFA) | Business owners can use an IFA to access policy cash value for business financing needs without triggering tax events |
How to choose the best life insurance for small business owners?
As a Canadian entrepreneur, you need to consider several factors like the size of your business and the policy ownership when making this decision to get life insurance for your business needs. Here are some key decision-making tips:
Assessing business size and stage
The size and stage of your business play a significant role in determining the type of life insurance policy that suits your needs.
For a start-up or smaller business, term life insurance might be more affordable and suitable for covering short-term risks.
In contrast, a more established business may benefit from permanent life insurance to provide long-term stability and growth opportunities.
Evaluating personal vs. corporate ownership of policies
Deciding whether to hold the life insurance policy personally or through your business is a critical choice. Corporate ownership of life insurance, such as corporate-owned life insurance (COLI), can offer tax advantages, such as tax-free death benefits and the ability to use cash value as collateral.
Personal ownership, however, may provide more flexibility if you plan to use the policy for personal purposes in addition to business needs.
Consulting with our licensed advisors specializing in business insurance
Life insurance for business owners can be complex, so it’s essential to consult with an expert advisor who specializes in business insurance. Our advisors can help you assess your risks, determine the best coverage options, and ensure that you choose a policy that provides comprehensive protection and maximizes tax benefits.
How to get life insurance if I’m a business owner?
The best way to get life insurance as a business owner is to work with an experienced, professional broker like PolicyAdvisor. Let us help you assess the best options for your goals, compare quotes, and give personalized advice.
We can also collaborate with tax lawyers to ensure that your business will be passed down in a tax-efficient manner. Reach out to our experienced advisors let us get you started down the right path for covering yourself and the business you’ve built.
Frequently asked questions
How much life insurance do business owners need?
Determining your life insurance needs for business purposes will vary depending on your business’s unique needs. You should think about how much money would be needed to cover business expenses and liabilities such as:
- Business loans
- Inventory costs
- Costs to replace key employees
- Costs to buy you out of the partnership after death
We also recommend chatting with an expert insurance advisor who can discuss your goals and guide you on how much coverage would be best.
What’s the best life insurance policy for a business owner?
The best policy for your business will depend on your financial goals and details about your business, such as the structure, industry, size, and more. In general:
- Term insurance may be better for small business owners, as it’s more affordable and can cover short-term needs during the early growth years
- Whole life insurance may be better for owners of larger organizations who may have more capital and can better leverage the investment component
But, each situation is different. It’s always best to speak with one of our licensed insurance advisors to make sure you select the policy that would best secure your business.
Can life insurance help secure business loans in Canada?
Yes, life insurance can help secure business loans in Canada, particularly if the policy is used as collateral. Lenders may accept life insurance policies as part of a business loan application, especially if the business owner’s death could significantly impact the company’s operations. In such cases, a life insurance policy can provide assurance that the loan will be repaid.
What happens to corporate-owned life insurance if I sell my business?
If you sell your business, the corporate-owned life insurance policy will typically be transferred to the new owner, depending on the terms of the sale agreement. The new owner may choose to keep or cancel the policy. If the policy is tied to key person insurance, the buyer might want to maintain it to ensure continued protection.
Is life insurance a tax-deductible expense for business owners in Canada?
Generally, life insurance premiums are not tax-deductible for business owners in Canada. However, there are exceptions. If the life insurance policy is used as collateral for a loan or if it is part of a group insurance plan for employees, there might be some deductible expenses. Consult with an accountant to understand specific situations.
Can life insurance payouts go directly to my business?
Yes, life insurance payouts can go directly to a business, particularly if the policy is set up as key person insurance or as part of a buy-sell agreement. In these cases, the business is the beneficiary, and the payout can be used to cover business debts, transition costs, or buy out the deceased owner’s share.
How does life insurance protect a small business partnership?
Life insurance can protect a small business partnership through a buy-sell agreement. In such an agreement, the business partners take out life insurance policies on each other. If one partner dies, the insurance payout is used to buy out the deceased partner’s share, ensuring the surviving partner(s) can maintain control without financial strain. This also helps avoid conflicts with heirs or external parties.
- Business owners can use life insurance for key financial needs during their lifetime and beyond
- A life insurance policy can give business owners extra protection to compensate for loans, debts, or expenses they've incurred to get their business started
- Life insurance can be purchased in the business name to ensure that the business runs smoothly and without extreme tax implications after death
