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With a life insurance, the person covered can own it or they can have their company as the owner of the policy. Consequently, personal ownership means an individual is the owner of his/her policy while corporate ownership defines a life insurance policy owned by a company.
For personal ownership, the individual owning the life policy is the insured, a grandparent or a parent owning a policy that covers their grandchild or child, a wife or husband owning a policy that covers their spouse, a partner owning a policy that covers another partner etc.
When it comes to corporate ownership, a company fully owns the life insurance policy. For example, companies own life insurance policies on key employees, shareholders, or even future shareholders. In estate planning, it is very prevalent to see companies owning policies.
The difference between the two types of life insurance ownership lies in the reasons for owning each and the benefits.
Most people choose to own life insurance personally due to personal estate planning needs. These needs include creating a pool of capital that offsets income loss which occurs when the insured passes away. For others, personal ownership is a way of funding estate taxes or fixing up enhanced integration wealth transfer.
On the other hand, companies own life insurance because of a shareholder buy-sell arrangement, to provide protection for a key-person, or as security when looking to get a bank loan. Furthermore, some people prefer corporate ownership in personal estate planning due to tax advantages and access to corporate funds when it comes to paying premiums.
Personal ownership benefits
1. Income replacement: For centuries, life insurance has been a cushion to families especially where income earners have passed away. The death benefit acquired out of life insurance is investable for interest and dividends, or it can purchase an annuity. Either option is a means of replacing a portion or all the lost income.
2. Creditor protection: With a personal life insurance, creditors cannot seize the policy’s cash value. Personal ownership is applicable where one is looking to protect the proceeds of a life policy from creditors.
3. Probate fees avoidance: Provinces in Canada charge probate fees on the estate’s assets. However, a personal-held policy having a designated beneficiary is not chargeable when it comes to probate fees.
Corporate ownership benefits
1. Cash reserve: When a company decides to purchase a life insurance policy, it is buying a death benefit coverage amount. This death benefit is the compensation that the company will get in case of loss of an insured employee. Due to the cash value that comes with the policy, a company is able to access low-cost life policy loans when there is a need. In a sense, buying an insurance policy is like saving money in a bank for companies.
2. Lower premium cost: The price of premiums is lower when purchasing life insurance policy via a company than buying it personally. Most insurance companies calculate premium prices to encourage more companies to purchase life insurance policies for their employees.
3. Tax benefits: Most insurance firms will allow your company to pay pretax premiums on behalf of the insured.
When choosing the best way to own a life policy, consider the benefits that you get from each type of ownership. Personally owning a life insurance policy may seem the best option for you but before you go ahead and purchase, carefully study the advantages of owning such a policy through a medical professional corporation. This will help you make the best decision.