Corporate or personal ownership of life insurance: how to decide

An incorporated owner who needs permanent life insurance has a choice most people never face: the policy can be owned personally or by the corporation. The policy is the same. The insured is the same. The death benefit is the same. What changes is the tax paid on the way in, the tax paid on the way out, and who can reach the money in between. The right answer is usually corporate, but not always, and the cases where it is not are precisely the ones that get missed.

1. What the premiums cost

A premium paid personally is paid from income that has already been taxed at the owner's marginal rate. A premium paid by the corporation is paid from income taxed at the corporate rate. For active business income within the small business limit, that rate is 11 percent in British Columbia and 12.2 percent in Ontario. The top personal rate in both provinces is about 53.5 percent.

Two things follow. First, the corporate advantage is large only when premiums come from active income taxed at the small business rate. Premiums funded from a corporation's passive investment income, taxed at roughly 50 percent, cost almost as much as personal premiums. Second, the accountant's standard objection, that integration makes corporate and personal tax come out the same in the end, assumes the money eventually leaves the corporation as a taxable dividend. For a life insurance death benefit it does not, which is the subject of the next section.

Figures are rounded and use 2025 rates: BC and Ontario top combined personal rates of 53.5 percent, small business rates of 11 and 12.2 percent, and a corporate passive rate of about 50.7 percent. Owners below the top bracket see a smaller gap.

2. How the death benefit comes out

A personally owned policy with a named beneficiary pays the death benefit directly to that person, tax-free, outside the estate. That is clean and it is the strongest argument for personal ownership.

A corporately owned policy pays the death benefit to the corporation. The amount above the policy's adjusted cost basis is credited to the capital dividend account, and the corporation can pay it to the shareholders or the estate as a tax-free capital dividend. Over a long-held policy the adjusted cost basis erodes toward zero, so in practice nearly the whole death benefit comes out tax-free. The result for the family is the same as personal ownership, a tax-free lump sum, but it was funded with corporate dollars.

Put the two sections together over twenty years of a $30,000 premium: the personal owner has paid roughly $690,000 of tax to fund the premiums; the corporate owner has paid roughly $74,000. Both families receive the death benefit tax-free. The difference, about $616,000, stayed inside the corporation and compounded.

3. Reaching the cash value during life

A personal owner can borrow against the policy, take a policy loan from the insurer, or withdraw. The insurer loan and the withdrawal are dispositions and can produce a taxable policy gain once the cash value exceeds the adjusted cost basis. A bank loan secured by the policy is not a disposition, but the interest is deductible only if the borrowed money is used to earn income, and that is harder for an individual to demonstrate than for a business.

A corporate owner reaches cash value the same way, by a bank loan against the policy, and then moves the proceeds to the shareholder through salary, dividends or a shareholder loan. The corporation's use of the borrowed money, in its business or its investment account, meets the income-earning test more naturally, which is why leveraged corporate life insurance is the usual form of this strategy. The price is one more layer: the money is the corporation's before it is the owner's.

4. Creditor protection

This is where personal ownership wins outright. Under the insurance legislation of both provinces, British Columbia's Insurance Act section 65 and Ontario's section 196, where the beneficiary is the insured's spouse, child, grandchild or parent, or is designated irrevocably, the policy and its proceeds are exempt from seizure by the owner's creditors. The exemption fails for designations made to defeat creditors and gives way to bankruptcy law in an insolvency, but in the ordinary course it is strong, statutory and automatic.

A corporately owned policy has no equivalent. It is an asset of the corporation, available to the corporation's creditors. The practical answer is to hold the policy in a company that has no creditors: a holding company with no employees, customers or contracts, whose only assets are the policy and investments. That structural protection is good, but it is only as good as the separation between the holding company and the operating business, and it depends on the policy being moved there before any claim is in sight.

For professionals whose personal liability is not fully covered by incorporation, this section alone can decide the question in favour of a personal policy, or of a personal policy alongside a corporate one.

5. Probate and the estate

A personal policy with a named beneficiary bypasses the estate, so no probate fee is paid on it. In British Columbia the probate fee is 1.4 percent of estate value above $50,000; in Ontario the estate administration tax is 1.5 percent above $50,000. On a $2,000,000 death benefit that is up to about $28,000 or $30,000 avoided.

With a corporate policy the death benefit is not in the estate either; the corporation's shares are. Their value on death includes the insurance proceeds, so a plain share structure brings the value into probate indirectly. There are share arrangements that keep the insurance value out of the probated estate and direct it to the intended people; they are worked out with the lawyer as part of the corporate design, and we cover them in a review rather than here.

Separately, a named-beneficiary designation is a contractual payment, not a gift under the will, and so is generally outside the reach of a wills variation claim in British Columbia or a dependant's relief claim in Ontario. Corporate proceeds that flow to the estate through shares are more exposed to those claims, which is one more reason the shareholder agreement and the share design have to say where the money goes.

6. The deemed disposition on death

On the owner's death a personally owned policy produces no tax of its own. The beneficiary is paid and the policy ends.

On a shareholder's death the shares are deemed to be sold at fair market value, and a corporate death benefit makes the shares worth more. Without planning, the estate can pay capital gains tax on share value that reflects the insurance, then pay again when the corporation distributes its surplus. The standard post-mortem techniques, including the loss carry-back under subsection 164(6) within the estate's first taxation year, exist to collapse that double tax, and the capital dividend from the insurance is the usual tool for it. This is the real complexity argument against corporate ownership: it is not worse, but it has to be planned, and the executor has a deadline.

Moving a policy from one owner to the other

A policy already owned personally can be transferred to the corporation, and sometimes should be. Since 2016 the transfer is treated as a disposition at the greatest of the cash surrender value, the fair market value of anything the corporation pays for it, and the policy's adjusted cost basis. If the cash value exceeds the adjusted cost basis the individual has a taxable policy gain in the year of transfer; if it does not, the transfer is tax-free. The corporation should pay for the policy, or a shareholder benefit can arise under subsection 15(1). The reverse transfer, corporation to individual, works the same way and is rarely worth doing because it gives up the funding and capital dividend advantages for good.

The decision

Corporate ownership is the better answer when the premiums are large and funded from active business income, the corporation has retained surplus with nowhere tax-efficient to go, a holding company is in place or can be, and the owner already has an estate plan with a lawyer and accountant who will execute the post-mortem steps. That describes most of the incorporated owners we work with.

Personal ownership is the better answer when the premium is modest, when the owner is in a lower bracket, when the corporation's income is mostly passive, when creditor exposure is personal and serious, or when simplicity for the family at death matters more than the funding advantage. A smaller personal policy for the spouse and children beside a corporate policy for the estate is a common and sensible pairing.

Where to start

The decision follows from three documents: the corporation's most recent financial statements, which show whether the premium can be funded from active income and whether a holding company exists; the owner's will and shareholder agreement, which show where a corporate death benefit would actually go; and a current personal balance sheet, which shows the creditor and estate picture. Metacap Financial reviews all three with the owner before recommending the owner, and designs the policy around the answer rather than the other way round.