CRITICAL ILLNESS PROTECTION FOR BUSINESSES

SPLIT DOLLAR CI

Let me start this by saying that I am NOT qualified to give tax advice and what you will read in this blog is a digested summary of material presented to me by various carriers.

Something to remember:

·        Critical Illness Insurance is NOT yet addressed in the Income Tax Act, so everything we hear is at best an educated opinion. Because of this, I would only suggest Split Dollar CI to those who have at least a mildly aggressive attitude towards tax planning. If you or your client want to dot every i and cross every t, then possibly this concept is not for you.

The very first thing to remember-consider-think about is that the purpose of the purchase MUST BE protection against a critical illness. The client MUST BE buying the plan in order to protect his business in the event of a cancer diagnosis, a heart attack or stroke, or any of the covered conditions.

I remember attending a meeting close to 40 years ago where someone from the Income Tax Department was giving a presentation. One of the attendees got up and said, “I incorporated my business in order to reduce my income taxes.” IMMEDIATELY the person from the Income Tax Department stated that saving income tax is NOT a legitimate or acceptable reason for incorporating a business. They certainly know that it is a benefit OF incorporation, but it must not be the reason FOR incorporation.

The same applies to everything that follows here. It is a benefit OF purchasing a Critical Illness policy through your corporation, but it must not be why you do it.

Who should you talk to about this idea? In my opinion, your best prospects are corporation owners who have significant cash inside their company. (I will leave the definition of significant to you). This concept can allow the client to access that cash on a tax-free basis.

How does it work? First, your client decides that he/she wants to purchase a CI Insurance policy to protect the company in the event of critical illness of a shareholder or key employee. The company will then purchase and pay for a policy to protect against that eventuality. The shareholder or employee decides whether they want to insure against staying healthy. So they purchase a Return of Premium rider (called a Health Benefit by one insurer). The cleanest way to set this up is to have the employee/shareholder pay the premium for this feature directly and personally BUT it is often paid by the company and included in the income of the shareholder/employee as a taxable benefit. If it is done that way, the inclusion in income is ABSOLUTELY OBLIGATORY for this concept to function. A separate agreement is drawn up specifying the rights and obligations of each party.

Now, three things can happen:

1. The insured is diagnosed with a covered condition and meets the insurer’s requirements.

In this case, a benefit is paid to the corporation tax-free to protect the corporation against the insured’s critical illness. If the corporation chooses to pay any of this amount to the insured, that payment will be taxable. How it is taxable depends on whether the insured is a shareholder or a true employee. Discuss this and all tax related issues with your client’s accountant/tax advisor

2. The insured dies – with no Critical Illness amount payable.

If the Return of Premium on Death feature is included, the premiums will be refunded as spelled out in the agreement.

3. The client arrives at a point where the Critical Illness protection is no longer required - Which should DEFINITELY be after the peak period for CI claims – probably no earlier than age 55 but ideally when the illness will no longer have a significant negative effect on the company.

In this case, the shareholder/employee will receive a refund of all premiums paid – those paid by him and those paid by the corporation. It is the industry’s opinion, backed up by outside legal and tax experts, that this refund should be NON TAXABLE. Given that this includes the money paid by the corporation, it can be a very attractive option.

Plan design issues:

• The premium for the Critical Illness benefit and for the ROP/Health Benefit should be fairly close. Otherwise, it could be viewed as excessively attractive for the shareholder if he collects a MUCH larger corporate premium. One issue that worries me is a product offered by a large carrier, one of whose tax experts stated, at a Critical Illness presentation I attended, that they were not strongly in favor of the concept. They just wanted to make it available to people who liked their company – and then offer a ROP cost MUCH LOWER than the basic premium charged.
• I also like the idea of a Health Benefit as opposed to a Return of Premium. Insurance, of any nature, is protection against an unforeseen event. We MAY get ill, yet we MAY remain healthy. Return of Premium MAY be viewed as being more under the control of the insured and more vulnerable to questions.
• There MAY BE advantages to purchasing this concept via a Quebec Insurance Company. Your client should discuss the implications of Quebec Civil Law vs. the legal system in the rest of Canada, specifically as it relates to concepts like Life Insurance, Accident & Sickness Insurance, and accessory features.

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Long Term Care Insurance
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Critical Illness Insurance
Life Insurance
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