Business Insurance Part 2

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1 Business Insurance Part 2 Insurance Concepts for Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

2 Business Owner Insurance Concepts > Buy Sell > Key Person > Shared Ownership > Executive > IRS > IPP > RCA Retirement Strategies

3 Business Insurance 30 second RECAP! Part 1 Working with Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

4 Business Structures > Self Employed > Partnerships > Incorporated private business > CCPC > Publicly listed corporation > Professional Corporations

5 Business Taxation 101 > Incorporated > General Private business corporate tax rates 26% > 25% > (11% Provincial, 15% Federal) (manufacturing, farming, mining) > CCPC > 15.5% > Publicly > Do (4.5% Federal, 11% Provincial) > On first $500,000 Traded companies not qualify as CCPC

6 Capital Gains Exemption > First $750,000 of capital gains are tax-free > Qualified small business shares > Qualified Farm property > 50% of assets actively used in the business for the last 24 months > 90% of assets actively used in the business at time of sale > Shares owned by individual for last 24 months

7 Calculating CDA > CDA = Life insurance death benefit ACB > Life insurance death benefit net of policy loans > not net of collateral loans > Applies to permanent and Term policies > Applies whether there is cash value or not > > Notes: > > ACB usually goes to zero after 20+ years, cannot be negative CDA has to be paid out equally to all shareholders of the same class

8 ACB > ACB Adjusted Cost Basis Ensures that corporate money gets taxed properly in personal hands > The ACB of policy tracks the original premium paid by a company for life insurance minus the NCPI > > Formula Premiums Paid increase ACB > NCPI decreases ACB >

9 NCPI > NCPI > Net Cost of Pure Insurance Net amount at risk (NAAR) for the year multiplied by the probability of death in that year, ie: similar to T1 rates > Based on 1975 Select and Ultimate mortality table > Costs for any benefits or riders removed > Removes any ratings on substandard risks

10 CDA Tax Trap > Problem: > Potential death benefit shortfall created by CDA/ACB > Net death benefit may fall short of required amount > Buy-sell > Solution: > Face plus fund plus ACB Increases face amount so that CDA paid is equal to or greater than original death benefit > Removes risk of the ACB tax grind on CDA > Removes risk of underinsuring the need >

11 Advantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST. 1

12 Disadvantages of Corporate Owned Life Insurance A PARTNER YOU CAN TRUST. 1

13 Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing

14 Business Insurance Part 2 Insurance Concepts for Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

15 Business Owner Insurance Concepts > Buy Sell > Key Person > Shared Ownership > Executive > IRS > IPP > RCA Retirement Strategies

16 Buy Sell

17 Buy-Sell Advisor Role > Establish Value of business > Determine > Estimate succession plan succession tax issues > Recommend > Resolve solutions issues > Valuation Issues > Other Triggers

18 Valuation Methods > Fixed Price > Book Value > Multiple of Book Value > Capitalization > Independent of Earnings Appraisal

19 Buy-Sell Funding Options > Accumulated Wealth > Borrowed Funds > Purchase over Time > Sinking > Life Fund Insurance

20 Buy-Sell Triggers > Death > Disability > Retirement > Dissension > Bankruptcy > Marital Breakdown

21 Common Buy Sell Arrangements > Personally > Criss owned Cross > Corporately > Share owned Redemption > Promissory Note > Hybrid Method

22 Personal Criss Cross Buy-Sell > Set-up > Personally owned policies > Partners own policies on each other > Premiums paid personally > Partners are each others beneficiaries > Premiums can be paid by company but treated as taxable benefit

23 Personal Criss Cross Buy-Sell ABC Inc. A B 50% 50% A owns policy on B B owns policy on A A pays premium on B B pays premium on A A is beneficiary on B B is beneficiary on A

24 Personal Criss Cross Buy-Sell > Death of a Shareholder Shares of deceased transfer to estate/heirs Death benefit paid to surviving partner Funds used to buy shares from deceased shareholder estate/heirs Surviving partners end up with more shares

25 Personal Criss Cross Disadvantages > Premiums paid out of after-tax personal funds or paid corporately but as a taxable benefit > Can create inequities in premium payments > Complicated if more than 2 partners

26 Personal Criss Cross with 5 partners 8 4 policies policies 20 policies

27 Corporate Share Redemption Buy-Sell > Set-up > Company buys insurance on partners lives > Company pays for premiums > Company is beneficiary of all policies

28 Corporate Share Redemption Buy-Sell Death of a Shareholder 1. Shares of deceased transfer to estate/heirs 2. Death benefit paid to Corporation 3. Corporation redeems deceased shares with death benefit proceeds 4. Corporation cancels deceased partners shares 5. Surviving partners shares increase in value proportionate to cancelled shares

29 Corporate Promissory Note Buy-Sell > Set-up > Company buys insurance on partners lives > Company pays for premiums > Company is beneficiary of all policies

30 Corporate Promissory Note Buy-Sell Death of a Shareholder 1. Shares of deceased transfer to estate/heirs 2. Surviving Partner buys shares with Promissory note 3. Death benefit paid to Corporation 4. Corp. issues a tax-free dividend to surviving partner 5. Surviving partner uses funds to retire promissory note 6. Surviving partner receives shares from deceased partners estate

31 Corporate Buy-Sell Advantages > Generally > Premium > No cheaper to use corporate funds inequities removed T4A s for partners > Creation of CDA > Watch out for the ACB

32 Corporate Buy-Sell Disadvantages > No tax deduction for premiums > Policy is asset of company > Subject to creditors > Affects balance sheet > May affect CGE of company > Fund value considered a passive asset > Stop-loss rules may apply > Changing policy from corporate to personal > Taxable disposition could apply

33 Optimization Clause > Allows parties involved to choose best methodology > Promissory Note > Share Redemption > Hybrid > or take advantage of new laws in place at time

34 Key Person

35 Key Person Insurance Advisor Role > Establish the need for key person > Determine the value of key person > Recommend Solutions

36 Key Person Insurance > Replace the loss of a key person: > Owner/partner > Executives > Key sales people > Employees with highly specialized knowledge

37 Key Person Risks Chance of losing a 40 year-old to a long-term disability of 3 months or more before the age of 65 about 60% For three 40 year- olds the chance of one of them being disabled before age 65 about 90%

38 Value of a Key Person > Multiple > Debt of salary retirement > Replacement > Lost costs profits and increased expenses > creditors may reduce or withdraw credit > may lose customers > may lose other employees

39 Funding Solutions > Same as Buy Sell > Insurance > Life Insurance > Disability > Critical Illness

40 Key Person Insurance > Corporate owned and funded > Company is beneficiary > Premiums are not tax deductible > Creates > Can liquidity for company create benefits for key person s family > Shared ownership

41 Shared Ownership

42 Shared Ownership > Corporate Key-person/Buy-sell insurance required > Corporation has cash not required for growth of business > Shareholder wants to move corporate cash into personal hands > Shareholder > Shared seeking retirement funding arrangement cost strongly favours the shareholder

43 Shared Ownership Case Study Sole Shareholder, age 50 NS Corporation has a justification for corporate owned insurance. Corporation has excess cash not necessary for growth Shareholder wants to maximize retirement income tax-efficiently. $1Million

44 Corporation pays fair value for the assigned Face Amount Face Amount paid to the Corporation (CDA Credit) Genesis UL Face Amount plus FUND Shareholder Purchases Policy Shareholder Dies Shareholder assigns Face Amount to Corporation Fund Value paid to shareholder s beneficiary

45 Corporations share Survey the T100 market for a rate to use (Shareholder plans to stay in business beyond normal retirement age) Calculate the present value of T100 premium from now to life expectancy (approx. age 85 for a M50NS) Spread the Net Present Value out over the 10 year premium payment period

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50 Executive Retirement

51 Adequate Pension a normal level of benefits would be the same benefits provided under a registered pension plan without regard to the Revenue Canada maximum. This would be 2% x years of service x final average earnings or about 70% of pre-retirement income for an employee with 35 years of service. CCRA roundtable discussion (1998)

52 RRSP Limits Max. Contribution Max. Income > 2012 $22,970 $127,611 > 2013 $23,820 $132,333 > 2014 $24,270 $134,833

53 Executive Retirement Strategies > IRS/IRP > IPP > RCA

54 Insured Retirement

55 Corporate IRS The concept in 4 steps: Implementation Accumulation Disbursement Death and repayment

56 Corporate IRS Step 1: Implementation 1. The company is owner and beneficiary of the contract Implementation 2. Premiums are paid by the company from the excess retained earnings 3. Insurance premiums are not tax deductible

57 Corporate IRS Step 2: Accumulation period Minimum of 10 to 15 years Contract options deposit level Accumulation number of accumulation years date retirement income begins

58 Corporate IRS Step 3: Payout at retirement Two possibilities Loan by the company Re-lend to individual Disbursement Dividend Loan by the shareholder Guarantee Fee

59 Corporate IRS Step 4: Death and repayment Death benefit CDA = Death benefit Less ACB Death and repayment Heirs Non-taxable CDA dividends CDA ACB credits Retained earnings Regular taxable dividend Repay loans and Balance retained by heirs

60 Individual Pension Plan

61 Individual Pension Plan > Registered > Increases > Defined pension plan contribution room beyond RRSP limit benefit > Employer > Tax funded deductible contributions > Creditor Protected > Reduces RRSP Room through pension adjustment

62 RRSP vs. IPP

63 IA IPP Support > Prep and quote plan > Initial actuarial valuation and on-going monitoring > Past service calculation > Register > Annual statements > Pension > For plan with CRA adjustment calculation Quotes:

64 RCA s

65 Retirement Compensation Arrangements > Defined > Tax > More deductible contributions room than IPP > Creditor > Does benefit pension plan protected not affect personal RRSP room > Alternative to Bonus down strategy > Removes > Often capital from balance sheet used as Golden handcuffs

66 RCA Mechanics Non Insurance OPCO RCA INVESTMENT ACCOUNT RCA TRUST Refundable Tax Account

67 RCA Mechanics using Universal Life OPCO RCA INVESTMENT ACCOUNT RCA TRUST Refundable Tax Account

68 RCA Mechanics upon Retirement RCA INVESTMENT ACCOUNT RCA TRUST Refundable Tax Account

69 RCA Example RRSP Male Non-Smoker 45 years of age earns $200,000 RRSP of $200,000 Max. RRSP contrib. 35 yrs of service at retirement retires at 65 RRSP Retirement Income (assuming 5.5% ROR from age 65 to age 82) = $95,632 annual income RCA Expected Pension (indexing 5% to age 65, 70% of final 5 year average) = $321,647 annual income

70 RCA Disadvantages > 50% of contributions go to CRA RTA account > No > 50% > Can growth on these funds of growth goes to CRA RTA require large top-up deposits by Corp. if interest rates decline as it is a defined benefit plan

71 Business Insurance 10 second RECAP! Part 2 Insurance Concepts for Business Owners A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

72 Business Owner Insurance Concepts > Buy Sell > Criss Cross vs. Share Repurchase > Key Person > Shared ownership policies > Executive Retirement strategies > > > IRS IPP RCA

73 Business Insurance Part 3 Servicing Corporate Owned Insurance Policies A PARTNER YOU CAN TRUST. Jorge Ramos, CFP,CLU Director of Advanced Marketing 1

74 Thank You Jorge Ramos, CFP, CLU Director of Advanced Marketing

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