Tapping the potential of insurance to maximize wealth

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By Joelle Hall

Now that the new capital gains legislation has passed, many Canadians — especially small-business owners and incorporated professionals — are looking for ways to optimize their tax strategies, and one way to do that is by considering the role of insurance in financial planning.

For many business owners, it’s difficult to see insurance as anything more than a protection against liabilities, a sunk cost that will only be paid out in the event of an accident or illness. It may seem counterintuitive to think of insurance as an investment vehicle, but it is one of the best tools available for business owners and incorporated professionals to generate and maximize wealth.

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For corporations, the capital gains inclusion rate increased to two-thirds from one-half. In light of this, strategies such as life insurance emerge as an increasingly attractive option for wealth preservation and transfer.

Wealth advisers often encourage clients with excess assets to invest in a permanent life insurance policy. Not only do these policies offer a tax-advantaged account that grows tax free, but they also allow for the eventual tax-free distribution of funds to shareholders and beneficiaries through the capital dividend account.

But the strategic incorporation of life insurance into wealth management is just the beginning. Viewing insurance as a distinct asset class is essential for business owners crafting a robust financial strategy. This shift in perspective reveals insurance’s dual role as both a protector of wealth and a contributor to financial growth.

Beyond serving as a wealth accumulation tool, insurance also serves as a fundamental risk mitigation strategy for business owners. Ensuring that proper policies are in place safeguards both the enterprise and individuals against potential threats, including critical illness and long-term disability.

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A person’s ability to work is one of their greatest assets, so if an accident or illness prevents them from working, they will need to find an alternative source of income. Long-term disability insurance is an excellent income replacement that can be extended for several years. Alternatively, critical illness insurance, paid out as a lump sum, is a valuable option for covering short-term illnesses and associated medical costs.

In organizations with multiple owners, a buy-sell agreement, supported by life insurance policies on the current owners, is an important tool for protecting the business and its beneficiaries in the event that a co-owner passes away since this document stipulates who can purchase the deceased shareholder’s portion of the business.

The buy-sell agreement effectively provides for the continuity of the business while the life insurance policy ensures there are funds available to remunerate the beneficiaries of the estate for the value of the business.

Finally, key person insurance is a life insurance policy that companies can purchase on the life of an owner, top executive or individual who is critical to the business. For small businesses, the key person is typically the owner or founder. This type of insurance provides a financial safety net should the sudden loss of an important individual have profound negative impacts on a company’s operations.

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Insurance remains one of the best-kept secrets for business owners looking to generate and grow their wealth, but it doesn’t have to be. Insurance policies are accessible to business owners of all sizes and can be a great tool for magnifying wealth.

Business owners can benefit from working with a financial adviser to develop a tailored approach that incorporates insurance strategies within a broader wealth management strategy. A wealth adviser can work with business owners to determine a strategy that suits their organization’s needs and adapt these policies as the business evolves.

As owners grow their businesses and take out more income, their insurance needs will change, so it is best practice to review these policies periodically.

Joelle Hall is a portfolio manager and investment adviser at Richardson Wealth.

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