A lot of our work involves talking with business owners about how much money will need to be available upon their demise. Now this obviously is a different discussion when we are meeting with owners of start ups than it is with owners who are a few short years from exiting their business, but the most apparent needs are;

• Liquidity to keep the business going
• Liquidity for surviving shareholders to buy shares from the estate
• Liquidity to pay tax liabilities that arise at the time of death

During these discussions is not uncommon to observe owners wrestle with the question of how much of this risk do they want to transfer to the insurance company and pay a premium for doing so, versus how much of the risk are they prepared to take on themselves, thereby saving premium dollars.

The argument goes something like this…”if something happens, the survivors or the estate will be able to come up with some of the money so we don’t need to insure the whole amount.” And, especially as it pertains to the taxes due upon death, a common response is…” there will be enough assets for the estate to sell in order to pay the tax so why bother having insurance for this.”

The expression “self insure” invariably gets attached to these discussions.

We are not against the idea of people coming up with liquidity strategies that don’t include insurance. But to attach the term “self insure” to these strategies is a misnomer and can lead people into misguided comparisons. Let me explain.

In my opinion, the misunderstanding about self insurance hinges on the erroneous belief that a dollar earned and sitting in the company is the same as a dollar that would come into the company by way of insurance proceeds.

They are not the same because the Income Tax Act treats these two dollars differently. The dollar from the insurance company has a tax advantage over the dollar already sitting inside the business. Even though one layer of tax has already been paid on the corporate dollar, there is yet another layer of tax to pay when that dollar is paid out to shareholders. Insurance proceeds are not subject to this tax and consequently go tax free to surviving shareholders or to the estate. A so called “self insured dollar” forfeits the tax advantage of a truly insured dollar.

So the truth of the matter is that a business owner cannot self insure because without an insurance company, they cannot take advantage of the preferred tax treatment of insurance proceeds. Now, certainly anyone can come up with other ways of creating liquidity, but if insurance isn’t included, these tax benefits are lost.

There are solutions to this dilemma that any successful business owner should be aware of and consider as part of their planning. Insurance strategies in the marketplace today enable owners to take corporate dollars and wrap them in an insurance cloak and still give you the flexibility to use those dollars as you wish throughout your lifetime. Upon death, these assets become part of the insurance proceeds and therefore can receive preferred tax treatment.

Now this is true self insuring…continuing to use your assets as you plan throughout your lifetime, but partnering with an insurance company to create tax advantaged assets at death.

Contact us to discuss if these opportunities apply to you