May 19, 2021
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This blog will explain what is a “Split-Dollar Critical Illness” policy and more importantly why EVERY incorporated business owner, who is insurable, should have this policy as part of the Bumper Guard protection around them and their family members.
When we design Critical Illness (CI) policies for our clients, we design what I call a “guaranteed policy”. What this means is that you are either going to get a CI and the policy will pay out, or if you do not get a CI, then you can ask 100% of your money back…tax-free. This feature is called Return Of Premium and Canada is one of the last countries in the world still offering a Return Of Premium feature.
In Canada, while only 5% of Canadians have Critical Illness coverage, fully 85% of Canadians worry about getting a Critical Illness, and 58% of Canadians have admitted they would be in financial trouble if they were diagosed with a Critical Illness.
How do you determine how much coverage you need to put into place? For most men who contract a CI, their recovery period is around 12 to 18 months, and for most females the recovery period is around 18 months. So, you need to take a look at what your net annual paycheque is after taxes and then multiply it by 1.5. So, if your net annual income is $200,000 per year then you will need at least $300K of Critical Illness insurance coverage.
In order to implement a Split-Dollar Critical Illness policy you MUST have a corporation and you MUST be insurable.
A Split-Dollar Critical Illness policy is a concept whereby both the client/insured and his/her corporation own an interest in a critical illness policy. When structured properly, these policies have a number of unique advantages for shareholders of Canadian-Controlled Corporations.
With a Split-Dollar Critical Illness policy the potion of the policy premium allocated to “pure” coverage is paid for by your corporation and the portion of the policy premium allocated to the Return Of Premium (ROP) associated with death, expiry, or surrender is paid for by the shareholder. If you contract one of the 25+ covered critical illnesses listed in your policy, and live for at least 30 days, then the policy will pay out the benefit. If, however, you have qualified to surrender the policy and ask for 100% of your money back, you would get both the corporately paid portion of the premiums as well as the personal paid portion of the premiums 100% tax free, personally.
This would allow you to pay much of the costs of the premium corporately at a much lower corporate tax rate, but if you remain healthy for a period of time, generally until you stop working or the coverage expires, you can have 100% of all premiums paid, repaid to you personally. So, this is a great strategy for getting money out of the corporation tax-free and at the same time protecting you and your family in case you are diagnosed with a CI.
The policies we design usually also come with a feature called “Best Doctors” services which means you have access to some of the best doctors in the world, who will help you to understand your medical condition and the treatment options available to you, so you can make an informed decision about your healthcare.
So how does a Split-Dollar CI policy work? The company receives a tax-free lump-sum benefit in the event the shareholder (who is the insured) is diagnosed with one of the covered critical illnesses listed in the contract. If this happens then we would recommend opening up a Health Spending Account (HSA) in order to take the money out of the corporation tax-free. In the event the shareholder (who is the insured) is not diagnosed with a critical illness and does not make a claim, then the shareholder would need to wait until the surrender clause kicks in and then they can surrender the policy and ask for 100% of all premiums paid, repaid to you personally tax-free.
Who benefits from a Split-Dollar Critical Illness Policy?
The company is protected against financial loss and is provided liquidity in the event a shareholder is diagnosed with a critical illness and needs to take time to recover.
A shareholder will benefit if they remain healthy and do not develop a critical illness and do not make a claim, they just wait for the surrender clause to kick in and they can collapse the policy and ask for 100% of the premiums paid back.
Let’s look at a case study:
Mike, age 40, applies for $750,000 of critical illness coverage with a Return of Premium benefit upon surrender after 15+ years. His company drafts a Letter of Directions and/or a Shared Ownership Agreement, which stipulates that the corporation owns and is the beneficiary of the $750,000 CI benefit while Mike owns and pays for the Return of Premium benefit.
The total annual premium for the policy is $33,880 and the corporation would pay $18,040 annually and Mike would pay for the ROP benefits of $15,840. After the 15+ year surrender clause kicks in, Mike can determine whether or not he wants to continue with the coverage or to collapse the policy. If he were to collapse the policy, he would receive $508,200 tax-free, which would equate to the premiums paid both by the corporation as well as him personally over that time period. Also, if Mike were to suddenly pass away, the ROP on death clause would kick in and again Mike’s estate or his beneficiaries would receive all of the money paid into the policy up until his death, tax-free.
At the start of this blog I indicated that we design “guaranteed” CI policies for our clients – so they are either going to get a covered Critical Illness and the policy will pay out, or once the surrender clause kicks in, you can ask for 100% of your money back. You can’t ask for more guaranteed than that.
If you’d like to get more information on the Split-Dollar Critical Illness Strategy, and how you can incorporate it into your own personalized financial and retirement plan, contact me at the coordinates below to apply to become my client.
Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.
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