How Shared Interest Critical Illness Insurance Can Benefit Your Business

Shared ownership critical illness insurance — sometimes referred to as split-dollar cost critical illness insurance — is a strategic approach to risk management that benefits both the involved corporations and shareholders/key persons, as it offers a solid financial solution with advantageous tax implications. Let’s explore how this strategy works and the potential benefits for your business.

In this article:

• What is Shared Interest Critical Illness Insurance?
• How does Shared Interest Critical Illness Insurance Work?
• When does Shared Interest Critical Illness Insurance make sense for your business?
• Benefits of Shared Interest Critical Illness Insurance
• Who Needs Split-Dollar Critical Illness Insurance?
• Tax Considerations
• Case Study
• Frequently Asked Questions (FAQs) About Shared Interest Critical Illness Insurance

What is Shared Interest Critical Illness Insurance?

Shared interest critical illness insurance is a type of policy strategy designed for businesses that want to stay protected from the financial fallout of a severe illness of a key employee, while still also providing a benefit to the employee if there is no severe illness developed over the course of the policy’s term.  

With critical illness insurance, if the insured (ie. key employee) develops a covered illness, the insurance company provides a lump-sum payout that can be used by the beneficiary (ie. the owner of the company) for various needs such as:

• Hiring a temporary replacement
• Buying back shares from a shareholder
• Covering overhead expenses
• Meeting salary obligations
• Ensuring continued operations

In addition to this potential lump-sum payout, Critical Illness insurance policies will also often include the option to have a Return of Premium (ROP) rider for an additional cost. This option allows for the following situations:

1. Upon Policy Termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded;
2. Upon Policy Surrender –If the policy is surrendered without a claim, premiums paid are refunded.

This means that with the ROP, should no critical illness occur, the shareholder/employee will receive a financial benefit as the premiums paid will be refunded.

How Does Shared Interest Critical Illness Insurance Work?

This strategy involves a corporation and a shareholder or key employee where they jointly purchase a critical illness insurance policy and enter into a formal ‘splitting’ of rights agreement, including the potential return of premiums paid optional benefits. 

The agreement specifies the ownership of each interest, their rights, how benefits are paid, their responsibilities, how the policy’s cost is divided among the parties, and what happens in the event of surrender or ownership change.

In most cases, a Shared Ownership Agreement is drafted with the following structure:

• The corporation will own, pay for and be the beneficiary of the CI lump-sum benefit on the key shareholder or employee;
• The insured individual or key employee is responsible for paying for the ROP benefit and will receive the ROP benefit upon policy termination or surrender. 
• This agreement must be drafted by a qualified legal advisor to ensure clarity and enforceability.

That being said, the structure for this strategy can vary. For example, here are some other structures that can be applied to Shared Interest Critical Illness Insurance plans:

First Structure 

• Insured: Shareholder
• Owner and beneficiary of critical illness insurance coverage: Corporation
• Owner and beneficiary of Return of Premium benefits: Shareholder
• Payment of benefit: To owners (one cheque) or to designated beneficiaries/directions to pay, depending on the Province

Second Structure 

• Insured: Shareholder
• Owner and beneficiary of critical illness insurance and Return of Premium on Death benefit: Corporation, then the corporation pays out a dividend to the shareholder 
• Owner and beneficiary of Return of Premium on Surrender or Maturity benefit: Shareholder
• Payment of benefit: To owners (one cheque) or to designated beneficiaries/directions to pay, depending on the Province

Third Structure

• Insured: Employee
• Owner and beneficiary of critical illness insurance coverage: Employee
• Owner and beneficiary of Return of Premiums Benefits: Corporation
• Payment of benefit: To owners (one cheque) or to designated beneficiaries/directions to pay, depending on the Province

Fourth Structure 

• Insured: Employee
• Owner and beneficiary of critical illness insurance coverage: Corporation
• Owner and beneficiary of Return of Premiums Benefits: Employee
• Payment of benefit: To owners (one cheque) or to designated beneficiaries/directions to pay, depending on the Province

When does Shared Interest Critical Illness Insurance make sense for your business?

 This strategy may make sense for your corporation and shareholders/key employees when there is a need for critical illness protection. 

For example:

• You’re a small business owner who needs protection to help pay for day-to-day costs or extra wages for new employees to keep up productivity.

• There are key employees seeking protection to help pay for health and living expenses in the event of a covered critical illness.

Otherwise, this type of plan can make sense for your business if it benefits all parties in the agreement.

Benefits of Shared Interest Critical Illness Insurance

In general, both parties involved can benefit from this type of plan. The company is protected against loss if the insured employee develops an illness, as they would receive the lump-sum benefit. If no critical illness occurs, the shareholder/employee will receive the refunded amount of all premiums paid after the policy terminates or is surrendered.

Other benefits of getting shared interest critical illness as a business owner include:

1. Business Protection: If a key employee is diagnosed with a critical illness, the payout helps ensure the business can continue its operations. This includes hiring temporary staff, meeting salary obligations, and reassuring creditors and investors that the company remains stable.
2. Tax-Efficient Planning: Generally, the lump sum received by the company is tax-free, making it a highly tax-efficient form of business protection. However, you should note that it’s crucial to work with tax advisors to ensure proper structuring and avoid potential tax liabilities. 
3. Return of Premium: For the employee or shareholder, the return of premium option means that if they remain healthy, they get their premiums back. This provides a valuable safety net and incentive, especially when approaching retirement.
4. Retention and Attraction of Key Employees: For business owners, offering a shared interest critical illness insurance plan can be a compelling way to attract and retain top talent. Employees are more likely to feel secure knowing that their company values their health and well-being.

Who Needs Split-Dollar Critical Illness Insurance?

Shared ownership critical illness insurance is not a one-size-fits-all solution, but it can be a powerful strategy for business owners to maximize protection and security for you, your business and your employees. 

Did you know?

• One in three Canadians will develop life threatening cancer;
• Half of all heart attack victims are under the age of 65;
• Each year 50,000 Canadians suffer a stroke with 75% of all victims being left with a disability.

Considering these facts, the CI Shared Ownership Strategy can result in significant financial benefits for the individual shareholder while the Corporation enjoys the protection of its key employees against loss from a critical illness.

If you’re not sure if your business should consider this type of coverage, speaking with a licensed insurance advisor can be helpful in providing insight on whether it’s right for you and your business. 

Tax Considerations

• Currently, premiums paid for critical illness policies are not a tax-deductible expense for the corporation or individual. That’s because the expense is not incurred to produce income for a business or property.
• The lump-sum benefit upon a claim is a significant tax benefit for the beneficiary as it is tax-free, and you won’t receive a tax slip for it

The industry considers critical illness insurance, including policies with Return of Premiums, to be accident and sickness insurance (A&S), and the premiums paid are not tax deductible. 

However, there are nuances regarding the return of premium benefit and its taxability. In some cases, the return of premium benefit could be considered taxable, so it is vital to seek professional tax advice before implementing such a strategy.

These nuances can vary by province, for example:

Section 2394 of the Quebec Civil Code states that it is the primary coverage that determines the characterization of a policy. This means that a policy with ROP benefits would also be considered accident and sickness because the primary coverage is the CI coverage. The same approach applies to Manitoba, Alberta and British Columbia.

This is not as clear in other provinces. The CRA has yet to confirm that critical illness insurance, more particularly Return of Premiums on Death portion, is A&S insurance and not life insurance. As such, the insurance industry is taking the same position as Quebec: critical illness insurance with Return of Premiums Benefits on Death is also A&S insurance. The premiums for both a standalone policy and a policy with ROP are not tax-deductible.

Case Study

Steven applies for $250,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. A Shared Ownership Agreement, drafted by his company’s lawyer, states that Steven owns and pays for the ROP benefit, while the corporation owns and benefits from the $250,000 CI lump sum benefit. 

Premium Structure

• The total annual premium for the policy is $8,323. 
• The Corporation pays the cost of insurance $6,572
• Steven personally pays for the ROP rider portion of $1,751

How does Steven Benefit?

Twenty years later, Steven decides that the CI coverage is no longer necessary when he is 60. His company cancels the policy and Steven exercises his return of premium option. Steven receives a cheque from the insurance company for $166,460. 

Frequently Asked Questions (FAQs) About Shared Interest Critical Illness Insurance

Why You Need Independent Advice

While shared interest critical illness insurance can provide several advantages to both parties involved, it is a complex arrangement that requires specialized tax and legal advice. To make sure the plan fits with their financial objectives and complies with tax laws, it’s recommended that both the business owner and the employee consult with independent professionals.

Not only does it require specialized tax and legal advice, it’s also important that the corporation and the shareholder/employee agree to the plan, and understand and be comfortable with the premium split and value. 

Overall, shared ownership critical illness insurance offers a balanced approach to risk mitigation, providing financial protection for both the corporation and insured shareholders/employees. By combining critical illness coverage with the flexible return of premium, this insurance solution not only protects against unexpected health crises but also makes the most of tax savings. 

If you’re not sure if your business should consider this type of coverage, speaking with a licensed insurance advisor can be helpful in providing insight on whether it’s right for you and your business. Here at Protect Your Wealth, we would be pleased to assist you in determining what a shared interest critical illness coverage would entail for your company. 

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, Alberta, and Manitoba including areas such as Markham, Nanaimo, Red Deer, and Steinbach.