Win/Win – A Critical Illness Strategy for Business Owners

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Insurance is not often thought of as a financial tool that can bring guaranteed returns while a policy owner is still living.

A strategy we use with business owners protects their business and financial assets while providing the ability to access money out of their company on a tax-advantaged basis in the future if they never make a claim.

The first step is securing a Critical Illness Insurance policy that pays out a tax-free lump sum benefit if the business owner (insured) is diagnosed with any one of 16-31 critical illnesses, depending on the policy. Every policy covers what we call the “Big 4” (heart attack, bypass surgery, cancer and stroke), which account for the majority of critical illness claims paid. After coverage for the “Big 4”, policies will cover a variety of different conditions. The lump sum benefit pays out 30 days after diagnosis of any of the covered illnesses, provided the definition of the illness is met. The base policy is owned and premium paid for by the company using lower taxed dollars.

A Return of Premium at Surrender (ROPS) rider is added to the base policy. This rider allows the business owner to receive the premiums paid on the base policy back as a tax free refund should they never make a claim. The return of premium rider should be owned by the business owner personally, rather than by the business. The premium for this rider will be added into the owner’s salary annually and they will pay tax on this portion.

Here are the numbers:

Benefit                   Premium                    Total Premiums over 15 years

$250,000                $6,187/annually          $92,805

After paying this premium for 15 years without making a claim, the business owner receives $92,805 back at policy surrender.  If the business owner paid themself a dividend in order to receive an equivalent amount of money from the business, $125,000+ would need to be paid out of the company for the same after tax result.  This Return of Premium works out to be a return in excess of 10% after-tax (guaranteed). However, should the business owner be diagnosed with any of the listed illnesses and meet the definition, his or her company would receive the $250,000 lump sum benefit tax-free, protecting him or her, their family and their business from potential financial hardship because of the critical illness.