Life Insurance: What is it?
The concept of insurance goes back to the days of the Romans, but it wasn’t formalized until the 18th century. Essentially, it’s a means of spreading financial risk among a large number of people who pay into a fund or pool. In this way, the cost is minimized for those who suffer an unexpected misfortune. Life insurance is a way to protect your company and your survivors and dependents against financial hardship. A life insurance contract or policy is a legal agreement between the owner and payer of premium and an insurance company that guarantees payment of the face value of the policy (‘death benefit”), upon death of the life insured to a beneficiary which is usually the owner’s spouse, other dependant family members or the company owned by the owner and key shareholder. The policy can be personally owned or corporate owned depending on the owner’s specific needs.
Life Insurance has become very popular as a tax efficient way to fund estate plans for owners of Canadian Controlled Private Corporations (“CCPC’s) and Professional Corporations. The corporation acquires a policy on the owner’s life whereby the owner, payer of premium and the beneficiary of the policy are the family holding company or professional corporation owned by the owner and life insured. The death benefit is credited to the company’s capital dividend account (“CDA”) on a tax free basis and the death benefit proceeds in excess of the adjusted cost basis (“ACB”) are paid out tax free to the family shareholders.
The amount and type of life Insurance is based on a proper needs analysis of the owner and life insured and an application is made to one or more life insurance carrier based on medical and financial underwriting of the owner and life insured. The primary factors in terms of premium paid or death benefit applied for will be based on age, medical history, smoker or non-smoker, risk profile in terms of driving history, avocations, travel risk outside North America and financial underwriting. Based on the application and medical evidence underwriting, the underwriter can accept the offer as applied for, increase the premium cost ( rated) or decline to make an offer.
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