Life insurance a helpful business tool when used properly

By Paul Russell, Contributor

Life insurance can be an effective business tool for co-owners of businesses, but it has to be structured appropriately, says Edmonton corporate lawyer Kirk Goodman.

“If there’s an issue about who is the beneficiary or how the money is to be used, it’s going to cost the estate and/or company a lot of time and money,” says Goodman, principal of KGPC LLP.

A recent Ontario Court of Appeal (OCA) case illustrates that point, he tells

Court documents show that in 2014, two men opened a jewelry store in London, Ont. As part of their business arrangement, they took out a life insurance policy on each other, with the company paying the premium. One of them died 16 months later, leaving the partner named as the sole beneficiary of a $250,000 policy.

The estate of the deceased partner, with the wife acting as trustee, disputed that payment. The judgment notes that she claimed her husband verbally told her she would receive the life insurance money if he died. She also pointed to a handwritten note made by the insurance agent and attached to the policy, concerning a discussion between the two business partners about having a buy/sell agreement.

“A handwritten note is not sufficient to trigger any change in the beneficiaries,” says Goodman.

If the partners wanted to have a buy/sell agreement in place, where one party would be obliged to use the life insurance money to buy out the other’s share, he says that needs to be specified in the shareholder agreement.

“The appellant court agreed that the partner was entitled to the insurance proceeds,” Goodman says, “as he was named a beneficiary, with no conditions.”

He advises business partners to talk to an insurance broker about the advantages of taking out life insurance on each other.

“They should view life insurance as more of an investment than a cost,” Goodman says, “or at least as a necessary cost, as is any insurance.”

He says there are three ways life insurance can be used as a business tool.

“First, it provides liquidity when it’s needed,” says Goodman. “When a key individual of a business passes away, the cash has to come from somewhere.”

Secondly, he says this influx of money provides continuity, giving the remaining employees time to stabilize the business.

“Hopefully it’ll continue to thrive in the absence of the missing party,” says Goodman.

Thirdly, the capital dividend should be tax-free, he says.

“When you purchase life insurance, I always recommend people review with their accountant to see if there is a tax benefit,” Goodman says

It’s also important that they consult a lawyer to update the shareholder agreement to accurately reflect what happens with the insurance money if one of the partners dies, he says.

“It seems like common knowledge, but people often make side agreements that they think will trump the formal insurance policy, but they won’t, unless they are properly papered,” Goodman says.

“If the policy says one thing, and the shareholder agreement says something else, there could be an argument. So, to avoid any trouble, make sure they say the same thing,” he says.

Most business people don’t use life insurance as a tool as well as they could, Goodman says, stressing that lawyers and insurance brokers have to be consulted, with all changes well-documented.

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