What is Key Person Insurance?

Most business owners understand that assets vital to the success of the enterprise should be insured.  Premises are routinely covered for fire and/or theft; vehicles used to make deliveries, insured; machinery needed for manufacturing, also insured. Given that these tangible assets are instrumental in the success of the business, it makes good business sense that the business is protected in the event of a loss.   But what about key employees? Many business owners overlook the impact on their business should a key employee die unexpectedly.

If you own or manage a company whose continued success is dependent on key people (it might even be you), it would be prudent to insure all key personnel whose death or incapacity would negatively affect profitability.  Key persons are those who contribute to the continuing success and profitability of the enterprise.

What happens when an owner or key person dies or becomes disabled?

  • The bank could lose confidence should an owner die, resulting in the calling in of loans and/or restricting on going credit required for the day to day operations of the business;

  • If the bank did have outstanding loans with a business now facing continuing without the owner or key individual, the loan agreement could restrict dividends or distributions to the surviving shareholders or family members;

  • Even if loans were not called, there would still be pressure put on the business to continue servicing debt while profits may be reducing;

  • If the deceased or incapacitated key person possessed special skills and experience, or had a close relationship with the customers, a decline in revenue would most likely result;

  • Suppliers might now demand payment up front if their confidence has been shaken;

  • There may be considerable training and recruiting costs to replace the lost key employee.

 What type of coverage is important?

Insuring against the death, disability and critical illness of a key person are all important.

Life Insurance Coverage

Determining the proper amount is often based on a multiple of earnings or an estimate of how much the business value would reduce with the loss of the key individual.  As a rule of thumb, most insurance companies are comfortable life insuring a key person up to five times his or her salary.

A higher multiple could be available in special situations.  The life insurance is owned and paid for by the company and should death occur, the proceeds are received by the company free of tax.  One of the advantages of corporate owned life insurance is that any of the proceeds not required directly in the business can be disbursed tax free to the surviving shareholders or possibly family members.  This would not apply to key person disability or critical illness insurance.

Disability Insurance and Critical Illness Coverage

When determining the amount of Disability and CI coverage an important question to consider is how long the disruption would last and the impact of losing that employee for possibly a long term disability.  Key person disability protection or Critical Illness coverage is available that could be used in hiring a replacement, or to maintain company cash flow while the disabled employee recovers.

Having the proper amount of key person life, disability and critical illness insurance can often mean the difference between a company surviving the loss of an owner or essential employee and not.   Call me if you feel this is something you would like to investigate in more detail.

Protecting Your Family

Let’s face it, raising a family today can be financially challenging.  The cost of living continues to increase, housing costs are rising along with education and extra-curricular activities for our children.  It is tough to make ends meet and still have something left over at the end of each month.

Most families today require both parents to work to afford the lifestyle they enjoy.  Losing one of those incomes through premature death, illness or a disability is a real risk that many families would have a difficult time facing emotionally and financially.

How do you protect your family?

  • Life insurance is designed to protect your family by providing the resource to replace income, pay off debt, and fund future education costs in the event that one of the parents dies.

  • Disability, or income replacement insurance, is designed to replace lost income if an individual is not able to work due to accident or sickness.

  • Critical Illness insurance will pay a lump sum benefit in the event of a diagnosis of many major illnesses.

If you and your spouse work for a company that provides employee benefits, you may already be insured for both life and disability insurance and in some cases critical illness.  Be aware that for the most part, employee benefit programs provide only a minimum amount of life insurance, usually based on one or two years of income.  If long term disability coverage is provided it may be enough for personal needs but that is not always the case.  Each situation is different, so it’s important that you and your spouse review your respective plan information to ensure that you have sufficient coverage in place. There are options to top up your coverage either through your group insurance or individually.

How much life insurance do you need?

If you or your spouse dies, the family will require a lump sum of capital to replace earned income.  You should aim to have enough cash for the following needs:

  • insurance to pay off any outstanding debts and mortgages

  • enough income from the invested capital to replace the lost income

  • an amount to cover future education costs

Think life insurance premiums are too expensive? 

Term insurance is an affordable solution for a growing family with a tight budget.  A 35-year-old non-smoking male can purchase $1,000,000 of ten-year renewable term insurance for less than $45.00 per month. A non-smoking female of the same age would pay approximately $30.00 per month for the same coverage. A relatively small cost to protect a family for $2,000,000 of tax free benefit in the event of an untimely death.

Let’s have a discussion about how we can build a program of protection specifically designed for your needs and circumstances.  Knowing what the needs are and what protection is in place goes a long way to providing peace of mind.

Private Health Spending Plans for the Owner/Operator Business

Individuals who have incorporated their business such as consultants, contractors and professionals often find that providing affordable health and dental care coverage for themselves and their families can be an expensive proposition.

Take Bob for example. Bob had just left his architectural firm to set up on his own. In looking at the options available for him to replace his previous firm’s Extended Health and Dental coverage for he and his family, he discovered that the monthly premium would be between $400 and $500 per month. This was for a plan that didn’t provide coverage for all practitioners and procedures, had an annual limit on the benefits, and a co-insurance factor of 20% (only 80% of eligible costs were covered). There wasn’t even any orthodontia coverage although he could purchase that in limited amounts at an additional cost! He also had to move quickly to replace his lost coverage as he had a pre-existing condition that most likely would not be covered if he waited too long to implement the new plan.

It seemed to Bob that there was a possibility of not receiving full value for his extended health and dental premiums. It was possible that he would spend far less than the $6,000 of premiums he would pay over the course of the year. The monthly premiums were also not tax-deductible. Fortunately, Bob found out about the Health Spending Account (HSA).

What is a Health Spending Account?

An HSA is becoming a popular alternative to traditional health insurance. An HSA is defined by the Canada Revenue Agency as a Private Health Spending Plan. Under the terms of a PHSP, eligible small business owners can;

• pay for their family’s medical expenses

• deduct the cost from the business income

• not have the benefit taxable to the business owner/employee

This article focuses on HSA as it applies to a one-person owner of a small business corporation. As you might expect, there are guidelines that must be met and restrictions that will apply.

• These plans cannot be for shareholders only. The shareholder must be a valid employee and receive a portion of his or her remuneration in the form of salary.

• The CRA prefers that the corporation employ the services of a third party to manage the plan and adjudicate the claims.

It is in the business owner’s best interests to use the services of a Third-Party Administrator (TPA) who specializes in PHSP’s to ensure that all the requirements are met, and all claims and payments are valid.

What does an HSA cost?

The cost of the Third-Party Administrator is very reasonable. There is usually an initial set up charge of a few hundred dollars and on-going fees run 5% to 15% of the claimed amount (plus taxes), with the typical fee being approximately 10%.

Some firms also charge an annual fee, so it is best to shop around or ask your financial advisor for advice. Being able to submit claims online and receive reimbursement by EFT almost immediately is a benefit that many of the third-party administrator’s offer.

How does it work?

Bob’s first experience with his HSA illustrates how the plan works. The HSA that Bob had implemented is referred to as a Cost-Plus plan which is the most popular arrangement with one-person corporations.

Let’s Break it Down

• Bob’s daughter started orthodontic treatments and his first charge was $1,000.

• Bob paid this amount by credit card (yes, he got points for that).

• Bob then forwarded the receipt for his payment directly to the TPA who would reimburse Bob his full $1,000.

• The TPA then bills Bob’s company for the amount of the treatment plus their 10% charge.

• Bob’s company pays the invoice and gets to deduct the $1,100 from corporate taxable income.

• The payment Bob’s company made is not taxable to Bob.

A good result! Bob has his expense reimbursed tax-free while his company gets to deduct the amount of the payment plus the administrative cost.

What are the advantages of an HSA?

• All medical procedures, necessary equipment and certified practitioners as listed by the CRA are covered in full.

• There are no medical questions for starting a plan and no pre-existing conditions clause to satisfy.

• All dependents may be covered.

• Deductible portions or shortfalls in other plans can be claimed.

• Benefits are not taxable while the costs to the corporation are tax-deductible.

As with any government regulated plan, make sure you employ the services of those who are experienced in advising on PHSP’s. They will not only guide you as to the best way to set up your plan, they will keep you out of trouble once you do.

As always, please feel free to share this with anyone you think may find it of interest.

BC Budget Highlights 2018

BC Finance Minister Carole James delivered the province’s 2018 budget update on February 20, 2018. The budget anticipates a surplus of $219 million for the current year, $281 million for 2019 and $284 million in 2020.

Corporate and personal tax rates remain unchanged.

The biggest changes are:

  • Elimination of Medical Services Plan (MSP Premiums) effective January 1, 2020
  • Addition of the Employer Health Tax (EHT)
  • Provincial Property Taxes
  • Childcare

The Employer Health Tax and Medical Services Plan premiums:

Effective January 1, 2020, the Medical Services Premium (MSP) will be eliminated. In last year’s budget update, MSP was reduced by 50% effective January 1, 2018. Starting in 2019, the budget introduces the Employer Health Tax (EHT). The EHT is to help fund the elimination of the MSP premiums.

The Employer Health Tax will be calculated as a percentage of payroll:

Provincial Property Transfer Taxes

Effective February 21, 2018, the following will occur:

  • The provincial property transfer taxes (PTT) will increase to 5% (from 3%) on residential property values above $3 million.
  • The PPT applies to foreign purchasers of residential properties in BC will increase to 20% (from 15%) and the tax will extend to include the Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
  • There is a new speculation tax on residential property in BC. This tax is targeted at foreign and domestic homeowners who don’t pay income tax in BC. Starting in 2018, it’s a rate of $5/$1,000 of assessed value, in 2019, this will increase to $20/$1,000.

Childcare

There will be a new affordable child care benefit that will reduce child care costs by up to $1,250 per month per child by 2020. The new benefit will apply in September 2018. Families with pre-tax incomes of $45,000 or less will receive the full benefit, (up to the cost of care) while those who make up to $111,000 will receive a reduced amount, scaling based on income. The government will be releasing an online benefit calculator to help parents budget.

The budget will provide up to $350/month directly to licensed child care providers to reduce fees. They will be the following:

  • Up to $350/month for group infant/toddler care
  • Up to $200/month for family infant/toddler care
  • Up to $100/month for group care for children aged 3-5
  • Up to $60/month for family care for children aged 3-5

To learn how these changes will affect you, please don’t hesitate to contact us.