Who should own your life insurance?
You’ve decided you need life insurance. Now it gets more technical: who should own the policy? Here are five factors to keep in mind.
Updated 
3 min. read
You’ve decided you need life insurance. Now it gets more technical: who should own the policy?
Owning a life insurance policy is a weighty decision with short- and long-term implications for taxes, legal matters, and estate planning. People often focus solely on after-tax premium costs and leave other critical factors out of their decision-making process. This article highlights essential points to consider before finalizing the ownership of your life insurance policy.
Doing this kind of planning up front is worth the time—changing ownership structure after the fact can be costly!
Here are five factors to keep in mind about life insurance
1. Purpose
Identify what need the insurance fulfills. Is it for short-term protection, personal coverage, or a corporate policy? Short-term needs may have less risk associated with ownership, while long-term goals, like estate succession or tax-effective liquidity, require careful consideration.
2. Potential ownership options
Common ownership options include individuals and corporations, and sometimes trusts or partnerships. If your policy is going to be owned by an entity other than an individual, plan for how the death benefit will ultimately reach the right person and consider tax and future implications. More on this in point five. If you name a corporation as the owner, make sure the same entity is also the payor and beneficiary of the policy in order to avoid any taxable benefit.
3. Tax Residence or citizenship
Always be aware of the tax status of potential owners, especially if they have foreign citizenship or reside in another country. Engage a cross-border tax specialist when necessary to navigate potential complications.
4. Rights of other individuals
In scenarios involving corporations, trusts, or partnerships, other parties may have rights to those entities' assets, including life insurance policies. Consider how to allocate the death benefit to specific individuals so they avoid sharing it with others (if that is your wish).
5. Corporate vs. personal
When deciding between personal and corporate ownership, you should be thinking about things like premium funding, creditor protection, future ownership transfers, tax-free death benefits, valuation issues at death, impact on the capital gains exemption, and beneficiary designation restrictions. Here’s a quick overview of a few key topics.
- Creditor protection: In a life insurance context, creditor protection can be seen in two ways. First, protecting the cash values from the policyowner's creditors while she/he is alive. Second, protecting the death benefit from the policyowner’s creditors at her/his death. When it comes to creditor protection and insurance, you’ll often see fine print mentioning that the protection applies “depending on circumstances.” What are those circumstances? Regarding cash values protection, they include who the beneficiary of the policy is, and the relationship of the beneficiary to the life insured. Note that in Quebec, they include who the beneficiary of the policy is, and the relationship of the beneficiary to the policyowner. The circumstances also include ownership: corporate-owned policies are not likely to enjoy this benefit. Read more about creditor protection.
- Future ownership transfer: Do you foresee transferring policy ownership to a child (life insured), spouse, or common law partner? This may be possible tax free for policies owned by individuals, but not those owned by corporations.
- Tax free death benefits: Life insurance death benefits are generally received tax free by the beneficiary, regardless of who owns the policy.[1] Often with corporate-owned scenarios, the death benefit is intended to go to a shareholder. There may be taxation involved in this secondary transaction, particularly if the shareholder is the beneficiary.
Setting up the right ownership structure will help make sure your insurance policy does what you intend. Taxes are a vital factor, but as you can see, they shouldn’t be your only consideration. Your advisor can help you delve into these topics and propose a structure that works for your needs.
Looking for more information? This detailed article goes into greater depth.
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Have Questions?
These comments are general in nature and should not be construed to be legal or tax advice, as each client‘s situation is different. Please consult your own legal and tax advisor.
Please consult the appropriate policy contract for details on the terms, conditions, benefits, guarantees, exclusions, and limitations. The actual policy issued governs. Each policyholder’s financial circumstances are unique, and they must obtain and rely upon independent tax, accounting, legal and other advice concerning the structure of their insurance, as they deem appropriate for their particular circumstances. BMO Life Assurance Company does not provide any such advice to the policyholder or to the insurance advisor.
Footnotes
1 Exceptions to this general rule include certain multi-life policies or foreign beneficiary situations where estate, non-resident withholding, or other forms of tax may apply depending on the foreign jurisdiction.