This is usually excellent advice. In our opinion, every business owner should have some insurance to cover their biggest risk. That is the risk of their own death or disability or a key person’s death or disability.
The problem lies not in the purchasing of the insurance, but in the setting up of the paperwork that goes with the insurance.
In term life insurance there are five key people to think of:
1) The person you are insuring
2) The beneficiary of the insurance if the insured person dies
3)The owner of the life insurance
4) The life insurance salesperson
5) The Chartered Accountant
Let me tackle these in the same order:
1) The most common mistake I see here is missing insurance on some owners. For example, let’s say a husband and wife own a company. The mistake I see is only buying insurance on the husband. The logic often is that the wife might be working at home and is “less critical” to the business. The reality in our opinion is that the wife is often equally important because of the “domino effect”. In a family, if a family member dies, the rest of the family grieves and also picks up that person’s load. The husband will be affected by the death of the wife and some insurance could certainly help.
2) The most common mistake we see here is that the beneficiary is not the company. In almost all cases, the beneficiary should be the company. There is an important detail though. This detail is that the company must have a plan in place in its shareholders agreement to pay the insurance out to the surviving shareholders and family. This is the second most common mistake we see. We see that the shareholders agreement is missing or incomplete when it comes to talking about corporate life insurance.
3) The owner of the insurance is more important with other types of insurance for example, “universal life” insurance. In term insurance it is generally set up that the beneficiary is the owner. However, each case is unique and this should be reviewed before the policy is set up. The reason for doing this review in advance is that changing the ownership of a policy can trigger tax.
4) The life insurance salesperson is critical to the proper setting up. Too often I hear stories of “quick sales” with no follow-up on the related documentation like the shareholders loan mentioned above. This can mean that although you have insurance, it is owned by the wrong people or payable to the wrong people.
5) The Chartered Accountant should be contacted early in the process to ensure that details like the shareholders loan are considered and attended to. I can say that many of my clients call me so they can “pick my brain” on this topic.
Feel free to become our client and “pick our brains” on this topic.
Contact us at partner@gilmour.ca or www.gilmour.ca
We are Professional Corporate Tax Accountants / Advisors
Chartered Accountants serving Langley, Surrey and Abbotsford British Columbia
