7 Reasons Why You Should Invest in Life Insurance

Buy & Sell Planning for Businesses

Buy-Sell Life Insurance

Planning for the loss of a business owner or partner is crucial to ensuring the continuity of your business and protecting the financial security of your family and the families of each partner or co-owner.

To protect your business, your loved ones and your co-owners or partners, you can implement what is known as a buy sell agreement, which specifies what will happen to the interests of a deceased owner, partner or shareholder. 

Buy sell agreement helps preserves control and value of a business at the death of one of the owners/partners.

These agreements provide that the estate of the deceased owner will be paid a fair value for his/her interest and that the surviving owners will maintain control and ownership of the business. Life Insurance on the owners can be a source of money to fund this agreements.

The structure of the buyout and  Life insurance funding should be tailored to the objectives of the business owners.

There are three main methods to fund these types of agreements:

Criss-Cross Method

Each shareholder purchases a life insurance policy on the life of the other shareholder(s) and names himself or herself as beneficiary. Subsequently, the shareholders and company complete a Buy/Sell Agreement that requires the surviving shareholder(s) to purchase the shares of the deceased shareholder, usually at fair market value.

Upon death of a shareholder, the surviving shareholder(s) uses the insurance proceeds paid from the deceased’s life insurance policy to purchase the shares from the deceased shareholder’s estate.

Promissory Note Method

With this method, the operating company purchases a life insurance policy on the life of each shareholder. The company is named as the beneficiary of the policies and a Buy/Sell Agreement is put in place requiring the surviving shareholder(s) to purchase the shares of the deceased shareholder at fair market value. Upon the death of one of the shareholders, the company receives the insurance benefit and pays the proceeds to the surviving shareholder(s) as a capital dividend, allowing them to honor the promissory note.

Corporate Redemption Method

The operating company purchases a life insurance policy on the life of each shareholder, and the company is named the beneficiary of each of the policies. This method requires the company to purchase and cancel (or redeem) the shares of the deceased shareholder.

No matter what kind of business you are involved in—a corporation, a partnership, an LLC, or even a proprietorship you should strongly consider a buy-sell agreement.

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Best Retirement Strategy with Individual Pension Plans (IPPs)

Individual Pension Plans (IPP’s) for Incorporated Businesses

An IPP is a registered and defined-benefit (DB) pension plan which is usually set up for one person. It provides an added benefit for high-level executives and incorporated business owners. IPP’s are approved by the Canada Revenue Agency (CRA) and offer great savings solutions for individuals who are 40 years or older, have a T4 income of more than $100,000 and have factually maximized their pension and RRSP contributions. You can think of an IPP as an RRSP upgrade. It is designed to cater to high-income earners who are looking for tailor made packages because their requirements are not met by the RRSP setup.  Comparison of RRSP and IPP: Suppose you’re a 45 year-old executive who has worked for the same organization since 1991 and have an average T4 income of $100,000 per year. If you have an IPP along with an RRSP and you decide to max-out both, assuming a yearly rate of return of 7.5%, then at retirement you will have $4,796,518 in registered retirement savings. Using this tax solution, you will have a yearly benefit of $362,549 when you’re 69 years old which is fully indexed to the consumer price index. Now, if you just used an RRSP for the same time period i.e. from age 45 to 69 than you would only save $ 3,226,413 in tax-sheltered retirement assets.

Introduced by the Federal Government in 1991, the IPP is a tax-avoidance structure with annual contributions fully deductible by the IPP sponsors or corporations. These contributions are also a non-taxable benefit for the beneficiaries until money is withdrawn from the plan. If you’re running an incorporated business, an IPP will let you invest hundreds of thousands of tax-deferred income dollars from your business into the IPP structure. This will ultimately give you non-taxable interest which will compound until you retire.  Annually, this nest egg would give you a retirement income of $243,871 from age 69 onwards. This makes it very clear that an IPP implemented with an RRSP provides an additional $118,678 in annual income as compared to only utilizing the RRSP.

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