Selling your Individual Life Insurance policy to your Medical Professional Corporation

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Recently I met with a medical doctor in Kingston Ontario who had been referred to me about helping her to understand her life insurance policy. She hadn't heard from the agent who had sold it to her in several years and wanted to know more about moving the policy into her new Medical Professional Corporation. Her accountant had mentioned that she could possibly sell her policy to the corporation for the cash value of the policy which at that time was $72,513. I told her that yes it can be done but there is a process I follow in order to establish the true value of the policy and to have the proper documentation that CRA would want to see in the event of an audit.

Before we proceeded, I told her that selling her policy to her company will resulted in some significant differences, compared to owning it personally and I proceeded to explained to her what was involved. When a policy is owned by the corporation, it does not become a tax deductible premium, but rather the premium is paid with corporate after tax dollars. On death, the proceeds of the life insurance policy would be paid tax free into her corporation and that payment would then appear as a credit to the Capital Dividend Account (CDA) of the Medical Professional Corporation. From the CDA, money is then paid to the surviving shareholder tax free as a Capital Dividend. However, the amount of the Capital Dividend that would be paid out tax free to the surviving shareholder is the death benefit less the Adjusted Cost Basis (ACB) of the insurance policy. I explained to her what the ACB was and how it was calculated. After gaining an understanding of all that was involved, she decided that she still wanted to move ahead.

In order for her to sell her personally owned life insurance policy to the corporation, I first of all gathered the information that was required to start the process and then engaged the services of an actuary. The true market value of a life insurance policy is not just simply the cash value of the policy, but also entails numerous other calculations including such things as changes in health. The initial evaluation came back identifying a range in market value of between $115,000 and $124,000.

With this information, she said she wanted to proceed and I then explained that the next step would be to actually transfer the ownership and beneficiary of her policy to her Medical Professional Corporation, so we completed the appropriate forms and sent them off to the insurance company. When I received the documents from the insurance company, identifying the new owner and beneficiary as her Medical Professional Corporation, I proceeded to pull together all the financial information on the policy that existed as of the date of transfer and sent that off to the actuary to do a detailed and accurate final valuation. Sometime later, the package arrived with a document identifying the market value of her policy as $132,517, as well as documents identifying corporate direction and those that CRA would want to see. With the process just about finished and all of the information complied, we met together with her accountant who finalized the best way to proceed given her particular circumstances. The entire process took about 5 months from start to finish; a timeframe that is not too uncommon. 

In a follow-up meeting with my client a short time later, I explained another idea to her. If she transferred her Disability Insurance policy into the corporation, she could see a significant reduction in her net after tax premiums as well as more net after tax income in the event that she became disabled. We are in the process of exploring the feasibility of doing this and I will explain it in more detail in my next blog