Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is where the corporation is the owner and beneficiary of the death benefit and the shareholder or employee owns the cash value of the policy.
Recently there has been growing interest in applying this strategy to a Critical Illness policy. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations:
Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.
A Shared Ownership Agreement is drafted documenting:
Under this arrangement the company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded.
Barry applies for $500,000 of lifetime critical illness coverage with a return of premium benefit upon surrender. His company lawyer drafts a Shared Ownership Agreement, which stipulates that the corporation owns and is beneficiary of the $500,000 CI benefit while Barry owns and pays for the ROP benefit.
How does Barry Benefit?
Twenty years later, when Barry turns 60, he determines that the CI coverage is no longer required. His company cancels the policy and Barry exercises his return of premium option. Barry receives a cheque from the insurance company for $182,628 Tax Free.
This represents an after tax rate of return on Barry’s annual ROP premium ($2,128) of 12.5% compound interest.
The CI Shared Ownership Strategy can result in significant financial benefits for the individual shareholder while the Corporation enjoys the protection of its key employees against loss from a critical illness.
Call me if you would like to explore whether this strategy will benefit you and your company. Or feel free to use the sharing icons to forward this to someone who may find this of interest.
Jack is a graduate of the Family Enterprise Advisor Program given by the Sauder School of Business at UBC. He has lectured extensively to professional groups including the B.C. Institute of Chartered Accountants, as well as individual accounting and legal firms. He is co-author of, and has been instructor for, both the introductory and advanced life insurance courses for the Canadian Institute of Chartered Accountants. He often is called upon to provide expert opinion or testimony in legal disputes involving life insurance or advisor conduct.