Wealth Preservation Through Key Person Life Insurance
The strategic question: Do we focus on wealth creation or wealth preservation? How corporate life insurance helps extract wealth from your corporation to your family while minimizing what goes to CRA
The Context: A Business Owner's Dilemma
Profile
Age
Age 69
Situation
Business owner with retained earnings in corporation
Challenge
How to extract wealth efficiently to family
The Core Question
The corporation is a transitional tool. It helps business owners generate wealth, but the ultimate wealth receiver must be the family, not the corporation and not CRA.
The question becomes: Do we focus on wealth creation or wealth preservation?
The Hidden Problem: The Cost of Extraction
Extracting retained earnings from a holding company to shareholders incurs significant taxation. Here's what happens to every $100,000 in corporate profit.
Small Business Rate (SBD)
Non-eligible dividends
Total "Net Tax" Paid
54.96%
($54,960 of $100,000)
NET COST OF EXTRACTION
42.8%
(Total Tax Paid - Corp Tax Paid)
General (Large) Rate
Eligible dividends
Total "Net Tax" Paid
55.98%
($55,980 of $100,000)
NET COST OF EXTRACTION
29.5%
(Total Tax Paid - Corp Tax Paid)
The Reality
Over half of corporate profits are lost to taxes when extracting to personal level. Whether you're paying 54.96% (SBD) or 55.98% (General Rate), the result is the same: more than half your wealth goes to CRA. The net cost of extraction (the additional tax beyond what the corporation already paid) is 42.8% for SBD or 29.5% for General Rate. This makes tax-efficient extraction planning critical for wealth preservation.
Source: iAssure Inc. (based on current Quebec tax rates)
The Solution: Life Insurance Strategy
Life insurance enables tax-efficient wealth extraction from the corporation to the family. Here's how it works:
Corporate Retained Earnings
Corporation has accumulated profits sitting in the holding company.
Deposit into Life Insurance
Corporation deposits cash from retained earnings into Universal Life or Whole Life policy.
Death Benefit Grows
Death benefit increases over time, growing tax-free within the life insurance contract.
Tax-Free Death Benefit
When death benefit is paid to the corporation, it's received completely tax-free.
Capital Dividend Account (CDA)
Death benefit generates credit to CDA, often equal to or close to the full death benefit amount.
Tax-Free to Shareholders
CDA credit allows tax-free dividends to be paid to shareholders in the amount of the CDA credit.
The Tax Advantage
✓ Death benefit received by corporation is 100% tax-free
✓ CDA dividends to shareholders are 100% tax-free
✓ Compared to 29.5% to 42.8% extraction cost through traditional dividends
The Strategic Question: Wealth Creation vs. Wealth Preservation
Which strategy aligns with your goals? Do we focus on the largest IRR per dollar invested in the strategy, or do we focus on passing to the family as much as possible of the wealth already created? Here's how two approaches compare:
Wealth Creation
Term-15 Life Insurance (Age 69)
Advantages:
- Excellent return on investment (IRR) initially
- Lower premium deposits required
- Fixed CDA credit of $500,000
Limitations:
- Limited ability to deposit excess cash
- Death benefit doesn't grow
- Not ideal for large retained earnings
- IRR is really high with shorter life expectancy
- IRR becomes negative a few years after year 15 due to increasing required premiums
Premium Increase After Year 15:
This 8x premium increase causes IRR to become negative a few years after year 15, making Term-15 less attractive for long-term wealth preservation.
Best For:
Maximizing ROI when wealth is still being created
Wealth Preservation
Universal Life Insurance (Age 69)
Advantages:
- Ability to deposit much larger amounts
- Death benefit grows significantly over time
- CDA credit increases (protects more from CRA)
- Net estate value grows substantially
- IRR remains positive throughout
Trade-offs:
- Lower IRR initially compared to Term-15
- Higher premium deposits required
Best For:
Protecting substantial accumulated wealth from CRA taxation
The Core Question
The corporation is a transitional tool. It helps business owners generate wealth, but the ultimate wealth receiver must be the family, not the corporation and not CRA.
If you're still building wealth: Focus on IRR and wealth creation (Term-15).
If you have substantial retained earnings: Focus on preserving the maximum amount from taxation using permanent insurance (Whole Life or Universal Life).
The Universal Life Projection
Here's how Universal Life preserves wealth over time compared to Term-15:
Source: iAssure Inc. This table shows how Universal Life preserves wealth over time. Calculated at max deposits for $500,000 Universal Life product with yearly renewable term cost structure (cost of insurance increases every year) and 6% rate of return on investments in the contract. By age 85, the CDA credit grows to $859,117 (72% increase from initial $500,000) and net estate value reaches $1,158,776. The IRR remains positive throughout, unlike Term-15 which becomes negative a few years after year 15 due to increasing premiums.
ROI Comparison: Term-15 vs. Universal Life
Here's how the return on investment compares at different ages (assuming policy starts at age 69):
Key Insights:
- Term-15 excels with shorter life expectancy: At age 75, Term-15 shows 685% ROI vs. Universal Life's 160%. This makes it ideal when insuring someone older or with health concerns.
- Universal Life provides consistent returns: Even at age 85, Universal Life maintains 57% ROI, while Term-15 drops to 144% and continues declining.
- Term-15 becomes negative: By age 90, Term-15 ROI turns negative (-1.4%) and worsens to -61% by age 100. Universal Life remains positive longer.
- Universal Life preserves more wealth: At age 85, Universal Life delivers $1.16M net estate vs. Term-15's $500K, despite higher premiums.
*Universal Life net estate values assume continued premium payments. Actual values may vary based on policy performance and premium payment schedule.
Combining Strategies: Best of Both Worlds
You don't have to choose one strategy exclusively. Here's how to combine both approaches:
Wealth Preservation in Corporation
Use permanent insurance (Whole Life or Universal Life) within the corporation to preserve retained earnings. This protects wealth from 29.5% to 42.8% extraction costs while growing CDA credit and net estate value over time.
- Protects retained earnings from extraction taxes
- Grows CDA credit over time
- Maintains positive IRR long-term
Wealth Creation Personally
If financial underwriting passes through, implement Term-15 on a personal level. This maximizes IRR per dollar invested while you're still building wealth personally.
- Excellent ROI with shorter life expectancy
- Lower premium requirements
- Maximizes return on personal investments
The Strategic Approach
This dual-strategy approach allows you to:
- Preserve corporate wealth: Permanent insurance in the corporation protects retained earnings from extraction costs
- Maximize personal returns: Term-15 personally provides excellent IRR while you're still building wealth
- Diversify risk: Different strategies for different purposes reduces overall risk
- Optimize timing: Use Term-15's high early returns personally while preserving corporate wealth long-term
Note: Financial underwriting must pass for personal Term-15. Work with your insurance advisor to determine eligibility and optimal structure.
Key Restrictions to Consider
Understanding these limitations helps you plan ahead:
Age Impact
The older you get, the more expensive life insurance becomes. Larger deposits are needed (partially offset by shorter payment periods). This makes early planning critical.
Medical Underwriting
As your medical file expands with age, it becomes harder to get approved at standard rates. Pre-existing conditions or health issues can significantly increase costs or limit availability.
Financial Underwriting Limits
The amount of life insurance you can purchase is limited based on both income and net worth. This is why the example shows an approved death benefit of $500,000: financial underwriting sets this ceiling.
Critical Point:
Since the approved death benefit is fixed (e.g., $500,000), permanent insurance (Whole Life or Universal Life) allows you to maximize deposits within this constraint, growing both the death benefit and CDA credit over time.
Why This Strategy Must Be Planned Ahead
- Tax-efficient extraction tools are limited in Canada
- Waiting until retirement often means higher costs and lower approval odds
- Medical and financial underwriting become more restrictive with age
- The earlier you start, the more flexibility you have in strategy selection
Key Takeaways
What this case study demonstrates
Extraction Costs Exceed 55%
Whether paying SBD (54.96%) or General Rate (55.98%), more than half of corporate profits are lost to taxes when extracting to personal level through traditional dividends. The net cost of extraction (the additional tax beyond what the corporation already paid) is 42.8% for SBD or 29.5% for General Rate.
Life Insurance Provides Tax-Free Extraction
Corporate life insurance enables 100% tax-free death benefits and CDA credits, compared to 29.5% to 42.8% extraction cost through traditional dividends.
Wealth Creation vs. Preservation
Term-15 focuses on wealth creation with excellent IRR initially (especially with shorter life expectancy), but IRR becomes negative a few years after year 15. Universal Life focuses on wealth preservation, growing CDA credit and net estate value over time with positive IRR throughout.
Early Planning Is Critical
Age, medical underwriting, and financial underwriting all become more restrictive over time. The earlier you start, the more flexibility you have in strategy selection.
Review Your Wealth Extraction Strategy
If you have retained earnings in your corporation, understanding your extraction options helps preserve wealth for your family. The question isn't whether to extract. It's how to extract efficiently.
Important Disclosure
This case study is illustrative only and not a substitute for professional advice. All client names and specific identifying details have been changed to protect confidentiality. This is an illustrative example of process and approach, not a guarantee of outcomes.
Assumptions: This case study assumes:
- Business owner age 69 at policy inception
- Approved death benefit of $500,000 (limited by financial underwriting)
- Quebec tax rates (top personal rate for eligible and non-eligible dividends)
- Term-15: Initial premium of $736.65/month, increasing to $6,052.50/month after year 15
- Universal Life: Annual premium of $46,052.70, consistent throughout
- Universal Life projection assumes consistent premium payments and policy performance
- CDA credit calculations based on death benefit received by corporation
- Tax rates and insurance costs may vary based on individual circumstances
Every situation is unique. Life insurance strategies, tax implications, and future outcomes depend on many factors including age, health, financial underwriting limits, tax rates, policy performance, and regulatory changes. What worked in this case may not be appropriate for your circumstances.
Life insurance and tax strategies require professional expertise. Always work with qualified insurance advisors, CPAs, and tax lawyers to understand how these strategies apply to your situation. Do not implement these strategies without professional guidance.
Source: iAssure Inc. (extraction cost table and Universal Life projection table). Term-15 renewal schedule based on Solution 15™ product structure.