WealthPillar ยท For incorporated owners and doctors in Brampton, Mississauga and Toronto
Key Person Insurance for Ontario Business Owners and Doctors
Key person insurance is a life insurance policy that your corporation owns on someone the business can't easily do without. The corporation pays the premiums and receives the money if that person dies. It gives the company cash to cover lost profit, pay down a loan or buy time to replace them, at the moment it is least able to raise money any other way.
You insured the building and the equipment. Have you insured the person who brings in the revenue? For most small corporations and medical practices, that person is the owner. WealthPillar helps you work out whether key person coverage fits, how much would make sense and how it should be owned, with your accountant and lawyer in the loop.
Who needs key person insurance?
It is worth a look if any of these sound like your business:
- One or two people bring in most of the revenue. If clients, referrals or billings follow a person, the business has a key person.
- There is a loan with your personal guarantee on it. If you were gone, the lender would still expect to be paid, often from your estate.
- You have business partners. If a partner died, could the company buy their shares from the family? That is buy-sell funding, a close cousin of key person cover.
- You are an incorporated doctor or other professional. The practice income stops when you stop, but staff, rent and equipment payments do not.
How does key person insurance work for an incorporated doctor?
In a medicine professional corporation, the doctor is usually the whole engine. If the doctor dies, billings end, but the lease, staff wages and any equipment or practice loans carry on until the estate winds things down. A corporate-owned policy can give the corporation money to meet those obligations and to help the family through the transition.
For a working doctor, being unable to work for months is a more common risk than dying young. That risk is covered by different products: disability insurance, which replaces part of your personal income, and business overhead expense insurance, which can help pay the practice's fixed costs while you recover. We look at all three together, so nothing is doubled and nothing important is missing.
How much key person coverage does a business need?
There is no single formula. These are the questions we work through with you:
- How much profit would the business lose while it finds and trains a replacement, and for how long?
- Which loans, lines of credit or leases would need paying down, and which carry a personal guarantee?
- What would recruiting a replacement cost?
- Is there existing coverage, through the company, a lender or a professional association?
The amount an insurer will approve also depends on the person's role, income and health, so the final number comes out of underwriting, not a guess on a website.
Term or permanent: which kind of policy?
Term insurance covers a set period, such as 10 or 20 years, and usually costs much less at the start. It suits needs that end, like a business loan or the years until a planned sale. Permanent insurance lasts for life as long as premiums are paid and costs more. It can suit long-term needs, such as estate planning for shares held in a corporation. Many owners use some of each. We show both side by side with the costs and limits written out.
Who owns the policy, and how is it taxed?
Usually the corporation owns the policy, pays the premiums and is the beneficiary. Whether that should be the operating company or a holding company matters, and so does how the policy fits with any shareholder agreement. In most cases the premiums are not tax-deductible for the corporation. How the payout is treated, including the capital dividend account rules for private corporations, depends on how the policy is owned and set up. That part belongs with your accountant, and we are happy to work with them.
