National Best
Key Person Protection StrategiesWhen a business loses a key person, several things can happen. First and foremost, the business is disrupted as the owners try to assess what has happened and develop a plan of action. This catastrophic event can cause a drop in sales, a loss of productivity as the business focus is diffused.
In addition, sales and contracts that have already been signed may be difficult to deliver on with the loss of the key person. This questionable performance may cause clients to seek alternative suppliers. This can cause a chain reaction that may get back to creditors. They may become nervous about loans and request liquidation of assets for repayment. In many cases, this one catastrophic event could lead to receivership or the dissolution of the company. Finally, even if the company is able to weather all of these storms they still must find a way to replace the skills of the key employee.
Fortunately, the risks surrounding the death or disability of the key person can be insured.
Businesses can purchase corporate-owned life insurance on the lives of their key people. If one of these key people dies, the business may receive a tax-free death benefit which it can use to meet expenses and repay debts, thereby easing the fears of creditors. The money can also be used as a reserve against the drop in revenue that may occur while the company goes through a period of transition. Finally, the money can be used to pay the costs of replacing the lost skills.
A side benefit for private companies is that the life insurance proceeds can be paid out as tax-free dividends to the owners once the business has recovered. Funds can also be used to provide a $10,000 tax-free death benefit to the spouse of the deceased. As well, an opportunity exists for the key person to take advantage of the tax-deferral capabilities of certain life insurance policies through split dollar coverage.
Disability insurance is also available on key people. The company owns the plan and is the beneficiary of the proceeds. The proceeds, of course, can be used for all the same purposes as proceeds from life insurance plans. The only difference is that the disability insurance proceeds cannot be paid out as tax-free dividends to the owners of the business, nor can they be paid tax-free to disabled employees unless certain conditions are met.
Corporate Disability Insurance - Injury to a Key Person
The Corporation or business will pay for the policy premiums in a case where a key person may become disabled. The Corporation may then use the benefit to replace the key person or to assist with the losses created by their absence. Alternatively, the Corporation may simply use the money to continue to pay the key person so that they may retain their services when they have overcome their injury. The premiums are typically paid with after-tax dollars and may be received tax-free inside of the Corporation depending on the nature of the contract.
Disability insurance comes in a number of forms. It can be purchased individually by employees or by persons who are self-employed for sole proprietors. It can also be purchased for all employees via a group benefits plans and employees may be segmented into various groups and each group insured based upon certain criteria. A third way is for the Corporation to purchase disability insurance for key employees or shareholders.
Disability insurance policies have a number of interesting features. Some of these features include inflation increases to coverage, increases to coverage based on future income, enhanced coverage based upon profession, and also a return of premiums option if no claims are made against the policy.
Corporate disability insurance is made to protect the Corporation in the case of a key employee becomes injured and disabled. Generally speaking the premiums for such coverage are not tax-deductible except in the case where the disability coverage is meant to pay for overhead expenses. Since individual cases will vary it is best to consult with the tax expert to determine whether premiums are deductible or benefits are taxable.
Business Overhead Insurance
Business overhead insurance is another excellent means by which companies can cover their operating costs should a key employee become disabled or ill. This coverage is used specifically to pay off the operating expenses of the business while the key person is sick or injured. This risk management coverage will allow the business to continue to operate while the key person is recovering. It is a particularly useful coverage for sole proprietors or for smaller companies.
If your business depends on your ability to generate income to help pay the bills, your absence due to a long- or short-term disability would impact the bottom line.
That’s why we provide business overhead expense insurance. It’s designed to help businesses with owners/partners who actively generate income (such as physicians, lawyers, accountants and engineers) pay ongoing fixed expenses—like salaries, rent, property taxes and utilities—in the event that a partner or owner becomes disabled and is unable to work.
Here are some Key Features and Benefits:
You may apply for coverage if you are between ages 18 and 60
The plan is non-cancelable until you reach age 65. After age 65, it is conditionally renewable, as long as you remain employed full-time (minimum of 30 hours per week) and are responsible for the expenses of maintaining an office or business.
Benefits can be paid over a period of time of either 12 or 24 months.
Benefits may start after as few as 15 days of disability
Premiums may be tax-deductible as a business expense.
Various options are available, including the ability to increase your coverage later.
If appropriate, return to work assistance may be provided to support your transition back to work.
Business overhead expense insurance is an expense reimbursement policy that covers the fixed monthly overhead expenses required to keep a business viable until the return of the insured owner, after a period of disability. This allows business operations to continue until the insured owner either returns to work or makes a decision regarding the future of the business.
Business overhead expense insurance is designed for principals of closely held businesses or practices and owners of small businesses.
It is most vital for businesses and practices in which the owner’s ability to generate income makes the difference between the office being open or closed for business—for example, physicians, lawyers, accountants, engineers and others.
Some business overhead expense policy can be maintained until the insured reaches age 65. After age 65, the policy is conditionally renewable while you are employed full-time (minimum of 30 hours per week) and responsible for the expenses of maintaining your office or business. Rates and benefit periods are subject to change after age 65. You may continue the policy for the total disability benefit up to age 75. After age 75, your total disability benefit will be reduced by 50%.
There may be exclusions to Overhead Insurance. Benefits will not be paid for disability if the disability is due to:
• An act or accident of war, whether declared or undeclared;
• Normal pregnancy or childbirth (however, disabling complications of either of these are covered)
Critical Illness Insurance – Key Person Becomes Critically Ill
In the case where a key person acquires a critical illness such as cancer, stroke or heart attack, the company may contract a policy that will pay a lump sum of money 31 days after the diagnosis. These monies can be used to replace the key person for the period of time that they are ill or can help to alleviate the losses suffered by the key person’s absence. The premiums are typically paid with after-tax dollars and the benefit is received tax-free inside of the Corporation.
Critical Illness FAQ
What is critical illness insurance?
Critical illness insurance is a form of health insurance that provides a lump-sum payment should you become seriously ill.
Do I need critical illness insurance?
In determining your need for critical illness insurance, you should consider benefits that may already be available to you through other insurance policies, such as life insurance and group health insurance. For example, the benefits offered through your employer’s group disability plan may provide appropriate and adequate coverage in the event of a critical illness.
You should also consider your personal circumstances and the added financial strain that could be brought about by dealing with a serious illness or disease. Public and private health insurance plans typically do not provide coverage for day-to-day living expenses such as travel to and from treatments, home care and child care.
How can I make a claim?
You can make a claim if a physician, licensed to practice medicine in Canada and specializing in your illness, diagnoses you with a critical illness or disease covered by your policy.
If my claim is approved, when will I receive payment?
Generally, a lump-sum benefit payment will be made to you 30 days after the claim has been approved.
There are no restrictions on how you use the money.
Once your claim is paid, your critical illness insurance policy ceases.
What if I never make a claim?
If you die for a reason not covered by the critical illness policy, the premiums you paid may be refunded to your named beneficiary. Some plans will return the premium or a portion of the premiums paid during the life of the policy if the policy matures and no claim has been paid. This rider has specific applications to business policies that cover a key person since there is the opportunity for the key person to pay for the rider and be paid the return of premium payment.
What if I make a full recovery?
You are entitled to collect the entire benefit even if you make a full recovery.
Is long-term care insurance the same as critical illness insurance?
No. Long-term care insurance provides for personal care on a long-term basis if you need supervision or assistance with daily living activities due to a chronic illness, disabling condition or cognitive impairment.
Long-term care policies generally reimburse, up to a specified limit, the expenses incurred for various types of care, such as nursing home or home health care; or they pay a pre-determined benefit amount on a daily or monthly basis.
• Is disability insurance the same as critical illness insurance?
No. Disability insurance, also known as “income replacement” insurance, provides a monthly income replacement benefit if you become disabled and can no longer perform the normal duties of your work. Generally, the benefit is limited to a percentage of your regular income and ceases once you earn an income or you no longer meet the definition of disability in the contract.
Unlike critical illness insurance which provides the full policy benefit in a lump sum payment on diagnosis of a critical illness, long-term disability policies may have a waiting period from the onset of disability. Unlike critical illness benefits, long-term disability benefits may be affected by other income you receive or by your full recovery from the illness.
• Where can I get critical illness insurance?
A licensed insurance agent or broker can help you find critical illness insurance and other types of health insurance coverage.
• Cancer Statistics
- An estimated 206,200 new cases of cancer and 80,800 deaths from cancer will occur in Canada in 2017.
- Half of all new cases will be lung, colorectal, breast and prostate cancers.
- About 1 in 2 Canadians will develop cancer in their lifetimes and 1 in 4 will die of the disease.
- 60% of Canadians diagnosed with cancer will survive at least 5 years after their diagnosis.
- At the beginning of 2009, there were about 810,000 Canadians living with a cancer that had been diagnosed in the previous 10 years.
Is disability insurance the same as critical illness insurance?
No. Disability insurance, also known as “income replacement” insurance, provides a monthly income replacement benefit if you become disabled and can no longer perform the normal duties of your work. Generally, the benefit is limited to a percentage of your regular income and ceases once you earn an income or you no longer meet the definition of disability in the contract.
Unlike critical illness insurance which provides the full policy benefit in a lump sum payment on diagnosis of a critical illness, long-term disability policies may have a waiting period from the onset of disability. Unlike critical illness benefits, long-term disability benefits may be affected by other income you receive or by your full recovery from the illness.
Where can I get critical illness insurance?
A licensed insurance agent or broker can help you find critical illness insurance and other types of health insurance coverage.
Get In Touch
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Calgary, AB T3C 2R9
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