Business owners need to ensure they are going to be financially stable in the event of a Critical Illness. One tax efficient way this can be done is with a split dollar critical illness policy. These policies are complex and require an experienced insurance agent to assist in setting them up to ensure everything is done correctly.

Who is a split dollar critical illness policy right for?

We normally recommend these types of policies to protect business owners, high level executives, directors, or shareholders form the devastating and prolonged effects of a critical illness.

Policy Structure

These policies involve two components, a base critical illness policy and a return of premium (ROP) rider. The base policy can cover anywhere from 3 to 31 illnesses depending on the insurance company and type of policy that is selected, there is also a range of return of premium (ROP) riders currently available in the marketplace (as of October 2022).

Who owns the policy?

Normally the corporation owns and pays for the base policy and the insured person personally pays the cost of the return of premium rider. This way the corporation pays the majority of the premium, but you as the business owner still get a tax fee return of premium at the return of premium date set out in the contract. The return of premium is not just for the cost of the ROP rider, but it is typically for the total cost of the policy up to the return of premium date.

Beneficiary?

Base Policy - We recommend the corporation be the beneficiary of the critical illness insurance, this money is paid to the corp tax free and can be used for payroll, and other bills while you are away recovering from the critical illness you were diagnosed with.
Return of Premium Rider - We recommend the insured person be the beneficiary of the return of premium rider. This is the most tax efficient way to structure the policy as when the return of premium is triggered the money will be paid to the insured person tax free rather than to the corporation that paid the base premiums.

Tax Benefits.

Insurance premiums for Critical illness policies are not typically tax deductible in Canada (please seek independent tax advice), the tax benefit comes when the critical illness payout is triggered or, if you haven’t been diagnosed with a covered critical illness, the return of premium rider would be triggered and the individual who paid for the return of premium rider would receive all the premiums back in a tax-free lump sum.

When the policy is set up correctly, the return of premium funds will flow to the business owner personally rather than back into the corporation, therefore, you have just been able to remove money from the corporation tax free.

Call today for a no fee no obligation 3 plan review.

Disclaimer: We strongly recommend you see independent legal and tax advice before implementing this strategy and take no responsibility for policies that are not set up through one of our Advisors. We accept no responsibility for changing tax laws that could impact the efficiency of this strategy.

Authorized distributor for The Canada Life Assurance Company, Equitable Life Insurance Company, The Manufacturers Life Insurance Company, Pacific Blue Cross, and Desjardins Financial Security Life Assurance Company. Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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