Shared ownership critical illness insurance is not just a safety net—it’s a strategic tool that offers financial security and significant tax advantages. By splitting the cost and benefits of a policy between a corporation and an individual, this approach ensures protection for both parties while maximizing financial efficiency.
Whether you’re a business owner or a key employee, this strategy could be a game-changer for your financial future.
What Is Shared Ownership Critical Illness Insurance?
Shared ownership critical illness insurance is built on two primary components:
- Critical Illness Benefit: Provides a tax-free lump-sum payment if the insured is diagnosed with a covered critical illness, such as cancer, heart attack, or stroke.
- Return of Premium (ROP): Ensures that if no claims are made by the end of the policy term, all premiums paid are refunded to the insured—tax-free.
This dual-purpose setup is both a safety net and a savings vehicle, making it particularly appealing to those seeking long-term financial security.
How Does Shared Ownership Work?
Shared ownership aligns the financial interests of a corporation and an individual. The corporation typically covers the premiums for the critical illness benefit, while the individual pays for the ROP feature using after-tax dollars.
This split is structured to comply with Canadian tax regulations, ensuring the setup remains beneficial for both parties. By sharing ownership, both the corporation and the individual can protect their financial interests while potentially recovering costs if no claims are made.
A Real-World Example: Mr. Johnson’s Story
Let’s look at how this strategy works in practice through the story of Mr. Johnson, a 50-year-old shareholder of Johnson Corp.
The Policy
- Coverage: $500,000 for critical illness
- Annual Premium: $6,000 for critical illness and $4,000 for ROP
The Split
- Corporation’s Contribution: $6,000 annually for critical illness coverage
- Mr. Johnson’s Contribution: $4,000 annually for the ROP feature (paid with after-tax dollars)
The Results
After 20 years with no claims, Mr. Johnson received a tax-free refund of $200,000 in premiums:
- $120,000 paid by the corporation for the critical illness portion
- $80,000 he personally paid for the ROP feature
Tax Savings
If Mr. Johnson had paid the $6,000 annual critical illness premium himself, he would have needed to withdraw $10,000 annually in dividends (assuming a 40% tax rate). Over 20 years, this would have resulted in $80,000 in personal tax savings.
Additionally, the tax-free ROP payout provided an additional $80,000 in savings compared to funds taxed as dividends. Combined, these factors delivered $160,000 in total tax benefits over the policy term.
Why Choose Shared Ownership Critical Illness Insurance?
1. Business Continuity
For the corporation, critical illness coverage ensures financial stability by providing funds to cover expenses, hire temporary replacements, or address other disruptions if a key individual falls ill.
2. Tax-Efficient Savings
For the individual, the ROP feature transforms the policy into a tax-efficient savings tool. If no claims are made, the premiums are refunded tax-free, ensuring that the individual doesn’t lose out on their investment.
3. Peace of Mind
This strategy offers dual protection, safeguarding both the business and the individual’s financial well-being.
Key Considerations Before Implementation
While the benefits are compelling, shared ownership critical illness insurance requires careful planning.
1. Tax Compliance
Ensure that the premium split reflects fair market value. If the arrangement disproportionately benefits the individual, the Canada Revenue Agency (CRA) may treat the excess value as a taxable benefit.
2. Legal Documentation
Draft a robust shared ownership agreement that clarifies the rights and responsibilities of both parties. This documentation helps prevent disputes and ensures compliance with CRA regulations.
3. ROP Relevance
Keep in mind that if a claim is made, the ROP feature becomes irrelevant. However, the critical illness payout will usually offset this loss by providing significant financial relief.
4. Costs of Setup and Maintenance
Be prepared for upfront legal and advisory fees. Evaluate whether these costs are justified by the long-term benefits.
Maximizing the Potential of Shared Ownership Insurance
To get the most out of shared ownership critical illness insurance, work with experienced financial and legal advisors who can guide you through the complexities. Proper planning ensures you can:
- Leverage significant tax savings
- Secure your business against unexpected disruptions
- Build a tax-efficient savings vehicle for the future
The Importance of Expert Guidance
Implementing shared ownership critical illness insurance is not a one-size-fits-all solution. It requires a tailored approach to align with your specific financial and business goals.
By consulting experts, you can navigate the nuances of tax compliance, legal documentation, and policy design to maximize the strategy’s benefits.
Conclusion: Protect Your Future with Confidence
Shared ownership critical illness insurance is more than an insurance policy—it’s a financial strategy. It combines the best of both worlds: robust protection against critical illnesses and the opportunity to recover costs through tax-efficient savings.
For business owners and key employees, this approach offers a unique way to safeguard their financial future while maintaining the resilience of their corporation. With proper planning and expert advice, shared ownership critical illness insurance can become a cornerstone of your financial strategy, providing security, savings, and peace of mind for years to come.