A split dollar critical illness insurance policy (often referred to as a shared ownership agreement), is a concept where more than one party owns an interest in a critical illness policy. This type of policy is offered by several Canadian life insurance companies, including: Manulife, Sun Life, Industrial Alliance, Desjardins, etc.
When structured properly, these policies have a number of unique advantages for shareholders or key employees of Canadian Controlled Private Corporations.
What is a Split Dollar Critical Illness Insurance Policy?
It is a structure that allows for a shareholder / key employee to own and pay premiums for a Critical Illness Insurance policy jointly with a company.
Although Critical Illness Insurance policies do not have cash value there are options to add Return of Premium (ROP) riders in the following situations:
- Death– If the shareholder / key employee (insured) dies without having submitted a claim for critical illness, 100% of premiums paid are refunded;
- Policy Termination– If the policy reaches its termination age without a claim being made, 100% of premiums paid are refunded;
- Policy Surrender – If a policy is surrendered any time after 15 years in force without a claim, 100% premiums paid are refunded.
How does a Split Dollar Critical Illness Insurance policy work?
The company receives a tax-free lump-sum benefit in the event the shareholder / key employee (insured) is diagnosed with one of the covered critical illness listed in the contract. In the event the shareholder / key employee (insured) is not diagnosed with a critical illness and does not make a claim, the shareholder / key employee could benefit from tax advantages and be refunded all premiums that were paid personally and corporately.
It is recommended that a “Shared Ownership Agreement” is drafted documenting (sample document available upon request):
- That the corporation will own, pay for and be the beneficiary of the Critical Illness coverage on the shareholder or key employee;
- That the shareholder / key employee will own and pay for the Return of Premium option upon the surrender of the policy.
Who should consider Split Dollar Critical Illness Insurance policy?
For those who are self-incorporated professionals (doctor, dentist, lawyer, relator...etc.) or own shares in a profitable Canadian Controlled Corporation and want to protect their business against the financial loss in the event they or one of their key employees is diagnosed with a critical illness.
Who benefits from a Split Dollar Critical Illness Insurance policy?
The company is protected against financial loss and is provided liquidity in the event a shareholder or key employee is diagnosed with a critical illness and needs to take time to recover.
A shareholder or key employee will benefit if they remain healthy and do not develop a critical illness and do not make a claim for 15 years while the policy is in force. Any time after 15 years of the policy being in force, the shareholder or key employee has the ability to cancel their policy and have 100% of premiums refunded. Provided this is set up properly, the shareholder or business owner could receive the premium in a tax-preferred way.
Mike (40 years old) applies for $200,000 of critical illness coverage with a return of premium benefit upon surrender after 15 years. His company drafts a Letter of Direction and/or Shared Ownership Agreement, which stipulates that the corporation owns and is the beneficiary of the $200,000 CI benefit while Mike owns and pays for the Return of Premium benefit.
Premium Structure – (Example below provided by Manulife Financial)
- The total annual premium for the policy is $6,523.00
- The Corporation pays the cost of insurance $6,143.00
- Mike personally pays the ROP benefit of $380.00
How does Mike Benefit?
Fifteen years later, when Mike turns 55, he determines that the Critical Illness Insurance coverage is no longer required. His company cancels the policy and Mike exercises his return of premium option. Mike receives a cheque from the insurance company for $97,845 ($6,523 annual premium X 15 years) Tax Free.
Why is this worth considering?
- 26% of Canadians will be diagnosed with a critical illness before the age of 65
- 75% of stroke survivors survive the initial attack
- Statistics show that 2 in 5 Canadians will develop cancer in their lifetime
If the shareholder / key employee remains healthy, they can benefit from tax advantages and recoup all the disbursements made. This business solution protects the company from the financial consequences it would face if its shareholder / key employee became seriously ill.
- Information in this article is based on the legislation and administrative policies issued by the tax authorities (CRA) on January 15th, 2018 and is subject to change. Coverage is not guaranteed and is subject to medical approval and a written application. Premiums calculated are based on age, health, smoker status, family health history and amount of coverage applied for and will be different for every person.
- For those looking to establish a Split Dollar Critical Illness Insurance contract it is important that we consult and work closely with your legal the tax advisors.
- For additional information or questions regarding the Split Dollar Critical Illness Insurance strategy reach out directly to Jamie Deba, firstname.lastname@example.org | 1.877.304.DENT (3368).
The information in this material is derived from various sources. Material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact us for benefit, pension and insurance advice based on your corporate or personal circumstances.