An insurance plan today can support your business and family tomorrow.
No one, with the possible exception of a professional gambler, expects to build a reserve of funds by gambling. Nevertheless, purchasing or not purchasing life insurance is a gamble in itself. If you buy life insurance, you only win if you die early because the insurance pays off your debts; if you don’t purchase life insurance, you only win if you live a very long life and pay off your debts without having paid life insurance premiums. What you must decide is whether you want to gamble that you will live to pay off all your obligations, or take a more conservative position and accept that you might die younger and be willing to pay the insurance premiums to ensure that your debts will be paid off at your early death.
Facts to Consider
To understand why you would need to provide these funds, ask yourself: Will my spouse be able to pay for:
- my funeral?
- our home (including any outstanding mortgage) and way of life for the children?
- outstanding credit card debt?
- funds borrowed from the RRSP to put a down payment on the house?
- the monthly mortgage/rental, utility and maintenance?
- mood changes
- day care?
- my personal income tax liability as an owner-manager if I have not repaid draws or have not deducted sufficient taxes at the source?
- short-term loans from the company?
- personal guarantees to financial institutions if there is no other source of income?
- our children’s future education or future medical costs should they currently have special needs or develop them in the unforeseeable future?
- RRSPs, investments or TFSAs for the future needs of our family?
- the capital gains tax (if) the second residence (e.g., a cottage) has to be sold?
- an equalization of my estate? For example, the family cottage has been left to three survivors, but only one has a real interest in preserving it. What will happen to the cottage if that person does not have the financial means to pay out the two other survivors? Does that mean the property would have to be sold to meet the terms of the will? Should life insurance be purchased to provide a cash payout to the other two beneficiaries to prevent the sale of the property and therefore keep it in the family?
Entrepreneurs should not defer purchasing life insurance.
What about Now?
Term life insurance provides coverage at a fixed premium for a limited period of time (i.e., the term). After the term expires, coverage at the previous rate is no longer guaranteed. Term insurance is usually the lowest-cost way to purchase a substantial death benefit.
Putting off purchasing life insurance is not an option entrepreneurs should consider because (in the event of your passing):
- your business associates will need cash flow to fill your vacancy
- Tlife insurance becomes more expensive as you get older: your province of residence, your life style, the amount of the payout and your gender will impact the insurance premium; for a non-smoking 25-year-old man, for example, the yearly premium for $600,000 of renewable five-year term life insurance may cost you $600* per year; however, as you age, the amount goes up: at age 46 (around $900) and age 55 (around $1,500); the problem with term life insurance is that, after the term expires, the policy has no value.
*Please note that all amounts and calculations are generic estimates. Each individual’s circumstances will impact the premium.
- even if you paid an annual premium of $1,500 (hypothetically) from age 25 to 55, the total cost of your premiums would be only $45,000, but the payout would be $600,000, which is an excellent return on your investment
- conversely, if you invest $1,500 per year at 5% compounded annually for 30 years, you would have only about $100,000 at age 55
- if you incur serious physical problems or develop a medical condition, you may not be able to purchase life insurance.
Key-person insurance is paid for by the company, with the company as beneficiary. This type of insurance is designed to cover the consequences of losing an indispensable person such as the founder or owner who can no longer contribute to the business through death or disability. Funds will be available to keep the operation going while restructuring is taking place after your death.
Key-person insurance can provide funds to buy your share from your survivors without the business assuming additional debt. A key person payout can be used to back your personal guarantees on business loans as well as pay deferred taxes and other regulatory deductions.
How Much Should You Buy?
How much insurance you need depends upon what you need to insure: self-employed earnings, current assets, debt, savings, cost of living, business and family structure, as well as the future needs of family and the business. To determine this amount, first put together a summary of the collective assets and debts of your business and your family unit along with details of the cost of your current life style and future expectations. Contact an insurance agent, discuss your situation and design a policy that will meet your needs.
Something to Think about
Don’t gamble with your future. Accidents and illness happen. Hope for the best but plan for the worst. Think about your business and family situation and what would happen if you were not there. Do not leave your survivors in jeopardy when you can take care of their futures today.
Contact Argento CPA today!
Source: BUSINESS MATTERS
Disclaimer: BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
BUSINESS MATTERS is prepared bimonthly by the Chartered Professional Accountants of Canada for the clients of its members.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.
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