Life Insurance for Business Owners in Canada

Start with where the money sits

Corporate money, when it’s invested, gets taxed heavily. That’s passive income, and passive income is taxed least favourably. That one fact drives most of the decisions on this page: whether your corporation should own your policy, pay for it, or stay out of it entirely.

Investment income earned inside a private corporation is taxed at a high corporate rate, and part of that tax only comes back when the corporation pays out dividends. A permanent policy owned by the corporation, if it meets the Income Tax Act test for an exempt policy, can grow without annual tax on that growth, within set limits. Money taken out later can still be taxable. Term coverage is a different conversation, and for a lot of owners it’s the only one that matters right now.

Each answer is explained in its own section below.

Does Life Insurance Your Company Owns Protect Your Family?

Not directly. If something happened to you, it’s the company that gets paid out on a policy the company owns, and that money protects the business as an asset. Your family only receives a death benefit from a policy that names them as beneficiary.

One executive I spoke with counted the key person policy his company held on him plus his own personal policy, and treated the total as his family’s coverage. It doesn’t work that way. The company policy pays the company, so the family’s number is only what the personal policy pays. You can hold more than one policy, just be clear which one is theirs.

The other version I hear a lot: business insurance and liability insurance through the company, and nothing personal. I mean, personally, you’re not covered. Liability and property insurance is a different product than life, critical illness and disability, and a general insurance broker is the one who places it.

Three questions for your own file

If only one can be placed right now, protect the family first. You’re doing the coverage to protect you, the family, the business, and when the budget forces a choice that order matters.

For the family amount, the goal is to wipe out your debt and then replace your income to some capacity over a set number of years. Size it on what you take home personally, not on what the corporation earns. Our guide on how much life insurance you need walks through the math.

Should You or Your Corporation Own the Policy?

From the insurance company’s side, it doesn’t matter who owns it. They just want the coverage in place. Who should own it comes down to tax, control and your plans for the business, and for protection coverage the biggest factor is whether you leave money in the corporation.

So the first thing I ask is how you use the corporation. Do you take everything out each year, or does money stay in? Is there just an operating company, or a holding company too? The answer usually points one way pretty quickly.

What tips the decision

One more thing changes when the corporation owns the policy. Your family doesn’t receive the death benefit directly. It goes to the company, and getting it out to shareholders runs through the capital dividend account.

Timing matters too. If corporate paperwork would slow down the application, apply personally and move ownership to the corporation by the time the policy issues, while the cash value is still low. A change of owner is generally treated as a disposition for tax purposes, and the result depends on the policy’s cash value, its cost base and who it moves to. Get the accountant to confirm before anyone signs the form.

This is general information, not tax, legal or accounting advice. Tax treatment depends on your corporation’s circumstances, so confirm with your CPA before changing who owns or pays for a policy. For how death benefits are taxed more broadly, see is life insurance taxable in Canada.

Can Your Corporation Pay for Your Life Insurance?

Yes, but if the corp is the owner and pays the premiums, it also needs to be the beneficiary so everything stays aligned for tax purposes. When the owner, the payor and the beneficiary don’t line up, tax problems can follow, most often a taxable benefit to you as an employee or shareholder.

Owner, payor, beneficiary: four common setups

This isn’t theoretical. On one file, a client company paid the premiums on a policy one of its executives owned personally, and the company’s CFO later confirmed the premium was being reported as a taxable benefit on her T4. That lines up with the CRA’s position that premiums an employer pays on an individual employee’s non-group policy are a taxable benefit.

The reverse catches people too. The owner wants the corporation to own and pay, then asks to put a spouse down as backup. I was going to say we can name a secondary beneficiary, but we can’t. It’s not the right approach when it’s owned corporately.

Either way, the premiums are generally not deductible to the corporation. The narrow exception is a policy a lender requires as collateral for a business loan, covered in the bank section below. Have your CPA confirm how this applies to your corporation before you change who pays.

What a Bank Requires Before It Lends

At the end of the day, the lender dictates the terms it will advance the loan on, and for many business loans, especially larger ones and practice purchases, that can include a set amount of life insurance assigned to the bank. This is called a collateral assignment. If you die, the bank is paid first, up to what you still owe, and anything left goes to the beneficiary.

Don’t assign anything or change a beneficiary until the lender tells you how it wants it done. Timing matters more than people expect. Bankers mostly want to see an application underway before the funding date: as long as you have something in motion, they have some peace of mind there.

His health history made a fully underwritten approval uncertain, and closing was close. So we stacked simplified issue plans, which ask fewer health questions and usually skip the exam but are still underwritten and cost more, until we hit the number. With the financing condition covered, we then applied for a regular plan separately to see whether full underwriting could give him a better long-term price. We treat fast policies like these as bridge policies, there to meet the financing condition and be replaced later if better pricing comes through. Nothing gets cancelled until the new policy is approved, issued and in force, and the lender has agreed to the swap.

When the loan is paid off or refinanced, the bank releases the assignment first. Only after that can ownership or the beneficiary change, and an assigned policy can’t be surrendered until the release is in. The full steps are in our guide to collateral assignment of life insurance.

How Insurers Decide How Much Business Coverage You Can Get

Insurers size business coverage from your finances, not from what you’d like to buy. They want to know there’s not a massive disconnect between your overall net worth and the amount of insurance you’re applying for, and each business purpose has its own measuring stick.

Insurers publish a multiple of income they’ll go up to. That’s a ceiling, not a recommendation. From my standpoint, starting at any number is still better than being at zero, and most of the owners I work with end up adding coverage as the business grows.

Large or stacked files are where the process matters most. Before I submit anything, I contact the underwriting departments anonymously, without your name attached, and give them your details so they can tell me how they will likely underwrite. I don’t like submitting applications without getting some answers, because I never want to flag you.

Even a well-prepared file can come back with conditions. On one large application, the insurer sent the case to its reinsurers, the companies insurers share big risks with, and three different answers came back. Each one traded price against amount:

When the answer is a decline, the move is to layer what can be placed now. On one key person file declined after reinsurance review, the plan became $1.75 million of additional coverage as three policies of $750,000, $500,000 and $500,000, with any or all of them owned by the company. I understand that wasn’t what the client was hoping for, but get it in place, then circle back and apply again across the board.

Want a sense of what a personal amount costs first? You can compare term life insurance quotes in a few minutes. For key person, buy-sell or lender coverage, get in touch, and the anonymous check happens before anything has your name on it.

Term or Permanent Life Insurance for a Business

Term covers most of the business needs I see. Permanent fits a narrower group: retained earnings, high income earner, insurable. For the ones where it does make sense, it can be a really attractive asset in the right scenario, and for everyone else term does the job for much less.

We don’t need to do an all or nothing approach, though. What’s become very common is a small amount that becomes a permanent policy, so you always have some level of coverage, with term layered on top for the years the bigger need lasts. You pay significantly more for the permanent piece, so it stays small.

Where term is the answer, pick the insurer carefully. For term coverage I recommend sticking to companies with excellent permanent products, because converting to permanent later without new medical evidence means converting within the same company’s line of products. That’s how a buy-sell policy can start as term and be converted once the business can carry it.

One incorporated professional had about $200,000 sitting in her corporation and a partnership arrangement that might change within two years. A small corporate permanent plan was on the table, but I didn’t want her jumping into it with that much uncertainty. What she needed was maximum flexibility, so we moved her existing term into the corporation, timed with a planned conversion, and left corporate permanent until the picture settles.

If corporate permanent does fit, the design comes next: early cash value or maximum death benefit, the payment period, and how money would come out later. I illustrate on conservative assumptions, and illustrated values are not guaranteed. Our guide to participating whole life in Canadian businesses goes deeper, or you can compare permanent life insurance options across insurers.

Why Disability Insurance Is Usually Owned Personally

Unlike life insurance, which can make sense for the corporation to own, disability insurance should usually be owned personally. You want the claim cheque going to you. If it goes to the corp, you’d have to pay it out to yourself as salary or a dividend, and tax comes with that.

Where a disability benefit ends up

Before you buy anything, check what’s already in place through a group or association plan. Disability benefits can integrate with other coverage, and the last thing I’d want is for you to overpay for something that overlaps. Incorporated couples can also look at a two-person group plan. Several insurers have said no to those, but a couple said yes, and the policies went in. More on that trade-off in why group disability insurance might not be enough.

Business overhead expense coverage is the exception. It reimburses the practice’s fixed costs, like rent and staff wages, while you’re disabled, so it makes sense for the corporation to pay for it, usually with a 12 or 24 month benefit period. It’s a separate policy, not a rider on a life policy, and the same goes for key person and buy-sell coverage. The add-ons that do exist are covered in our guide to how life insurance riders work.

If the budget forces a choice, income comes first. Critical illness is nice to have, but the bigger need for most owners is protecting their earning power. Owners who want both can look at shared ownership critical illness, or start with disability insurance quotes sized to what you actually earn.

Business Owner Life Insurance Questions

Getting Business Owner Life Insurance Through a Broker

An independent broker can compare business and personal coverage across several insurers and check your file anonymously before anything is submitted. Protect Your Wealth never charges a fee for this. Brokers are paid by commission from the insurer you choose, so comparing doesn’t add to your premium. We’ve worked with business owners and incorporated professionals since 2007.

If you already know what you need, you can start with our life insurance broker services or compare critical illness insurance quotes.