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Extract Retained Earnings Tax-Efficiently

A unique and interesting insurance strategy that has been gaining a lot of popularity lately is a jointly owned critical illness policy, also known as a shared ownership critical illness policy.

Firstly, let me explain the mechanisms of a critical illness policy and the various components that go into making this strategy, and then I will explain how this is utilized to transfer retained earnings from a corporation to a shareholder tax-efficiently.

What is critical illness insurance?

Quite simply it’s an insurance policy that will pay out in the event of a critical illness provided that the insured survives a specific waiting period that is outlined in the policy.

The usual waiting period for most insurers is 30 days, however I’ve seen some that are as long as 60 or even 90 days.

The insured also has the option of selecting how many critical illnesses they want covered under their contract.

The most common illnesses covered are the top 3 of cancer, heart attack, or stroke. However, having contracts that cover up to 30 different illnesses are quite common and affordable.

The two different riders that I’m going to discuss today as they are pertinent to this strategy are the ROPD and ROP.

ROPD – (Return of premium upon Death)

In the event that the insured dies before he survives the waiting period or dies from an illness that isn’t covered under the contract, the insurer will return all premiums paid up to that point.

ROP – (Return of premium)

This rider is as the name implies; you will receive back all your premiums paid after a certain time has elapsed. The most common time periods are 15 years or 20 years.

Okay, so how does this all work together to help you extract retained earnings tax free?

This strategy works by having a shared ownership agreement between the corporation and the shareholder.

Corporation: The business will be responsible for paying the premiums for both the critical illness insurance and the ROPD rider.

It will pay for these premiums with retained earnings as insurance premiums are in most cases not deductible to the corporation.

Shareholder: The shareholder will be responsible for paying the premiums for the ROP rider.

They will pay for that premium with personal earnings. This is very important for this strategy to work.

Because the corporation pays for both the CI benefit and the ROPD, they are also the beneficiary of both those benefits.

In the event of a critical illness or death of the shareholder both those benefits will be received by the corporation.

The same is now true for the shareholder that pays for the ROP rider.

After 15 or 20 years the entire amount of premiums paid will be returned to the shareholder tax-free as they have paid for this benefit.

There are obviously more tax complications than this, but this gives you a brief overview of how this strategy works and how it can be implemented to not only protect your family and business in the event of a critical illness but also provide a mechanism to extract retained earnings.

I will encourage you to schedule a free 30-minute strategy session with me.

What this session will highlight is:

  1. If you have unforeseen liabilities threatening your future
  2. How you can be more efficient with your finances and save on taxes
  3. How you can receive maximum after-tax value from your company if/when you sell
  4. How you can pass down your business to your family without sacrificing your goals
  5. If your planning has something missing from it

So please schedule a session and I look forward to exploring how we can help you.

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