Ask SRJ: What are the Benefits of owning Life Insurance through a Medicine Professional Corporation vs Personally owning it?
It is credible to state that several physicians prefer to obtain life insurance through Medicine Professional Corporations to owning the life insurance personally. However, the question arises, of whether the benefits of owning life insurance through a Medicine Professional Corporation truly outweighs the benefits of personally owning and paying for life insurance.
Toronto Accountants state that there are several advantages, as well as disadvantages for owning life insurance through a Medicine Professional Corporation, as well as personally.
Owning life insurance through a Medicine Professional Corporation has some advantages. For instance, owning life insurance through a Medicine Professional Corporation allows for greater tax efficiency. Accountants of Toronto estimate that if the monthly premium for insurance is $100, if it is being paid for by the Medicine Professional Corporation, the tax rate would be 15%, which would require the corporation to generate $115 pre-tax income. However, if the premium was to be paid personally, the marginal tax rate would be significantly greater, at a rate of 43%. Toronto Accountants state that Physicians who consider allowing a Medicine Professional Corporation pay for their life insurance would save approximately 28% of the amount paid for life insurance premium in taxes.
Although allowing a Medicine Professional Corporation pay for life insurance comes with certain benefits, such a route still has certain disadvantages associated with it. For instance, Toronto Accountants state that allowing a Medicine Professional Corporation pay for life insurance premium would result in any accumulated cash value in the insurance policy, as well as the death benefit remaining unprotected from creditors.
Moreover, if such a route were to be pursued, it becomes beneficial to make the Medicine Professional Corporation the beneficiary, as otherwise, if the beneficiaries are listed otherwise, the death benefits would become fully taxable to the beneficiaries. However, a disadvantage for making the Medicine Professional Corporation as the beneficiary is that it makes it difficult for the spouse/children to receive the death benefits, as the process may take a little longer. Therefore, in terms of the intended beneficiaries receiving the benefits quicker, Toronto Accountants state that it is more advantageous to have personally owned life insurance.
Furthermore, owning life insurance through a Medicine Professional Corporation would result in the amount being paid into the corporation’s Capital Dividend Account. As the Adjusted Cost-base of the insurance policy would be deducted and re-paid to the corporation, although the death benefit will remain Tax-Free, Accountants of Toronto state that the amount will be lower than the amount stated on the original insurance policy.
Lastly, another disadvantage of allowing a Medicine Professional Corporation own the life insurance, is that as minors are not permitted to be shareholders of the corporation, they are incapable of directly receiving the tax-free benefits from the Capital Dividend Account. Therefore, if deceased individual’s grandchildren or children were the desired beneficiaries, it may become difficult for the death benefit to reach them.
On the other hand, if the life insurance was personally owned, an advantage would be that any cash-value accumulating within the insurance policy, as well as the death benefit would be protected from creditors. Moreover, Toronto Accountants state that it is also advantageous to own life insurance personally, for the purpose of allowing the desired beneficiaries to receive the benefit much faster than having the beneficiaries wait for the benefit to be declared as a tax-free dividend from the corporation. In addition, Accountants of Toronto state that it is also beneficial to personally own life insurance as it results in receiving a higher amount as the death benefit. As the benefit amount will by-pass the estate, it will be exempted from any probate fees, and therefore, the intended beneficiaries will earn a larger amount.
Although there are several benefits for owning life insurance personally, it does not come without a downside. Toronto Accountants state that the personal income tax rate is much higher than what the tax rate would be for a physician’s Medicine Professional Corporation. For instance, if an individual’s life insurance premium rate is $250, at a personal income tax rate of 43%, the individual would have to generate the amount of $439, in order to pay the premium amount of $250 after tax. On the other hand, the tax rate for the corporation is much lower; therefore, Accountants of Toronto suggest that it is disadvantageous to own life insurance personally, for tax-cost savings purposes.
SRJ Chartered Accountants with offices in Toronto and Mississauga can assist you in determining the best way to own your insurance and the tax savings available to you. Our clients range from small to large corporations and high net worth individuals. If you have any questions, you can reach us by email (firstname.lastname@example.org) or by phone (647-725-2537).