How can indebtedness jeopardize a business?

Business Banking relationships are essential. Many businesses acquire a bank loan collateralised by the total value of their assets to survive financially. Suppose a business owner with a good relationship with his bank dies. In that case, the bank may call the loan if the business begins to experience financial duress and defaults on repayment.

  • Avoid collateralising personal assets. The prospect may not be favourable when the loan equals or exceeds the value of the business and personal assets.
  • Following established rules, a bank may ask a business owner to collateralise a loan, not just with business assets and land, but with additional personally owned assets, which may encumber a spouse’s co-owned assets.
  • Add to that a possible collateralising of any assets of a son or daughter (and spouses) who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held hostage by the lending institution financially or forced into liquidation.

Can life insurance reduce the risk associated with the family business debt? You can solve this in a family business such as a farm by insuring the oldest and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover the debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans, win back ownership, and discharge any personal assets liens.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy for each principal business owner and key persons. This product could provide a substantial sum of money to pay off debt if one were to experience a significant illness such as a heart attack or stroke. If an individual were incapacitated, they may need to be bought out by a partner or an heir (a buy-sell agreement should exist). The risk of a loan being called increases when an owner-manager is critically ill, and the bank manager loses confidence in the stabilising influence of that owner.

Note: Life insurance contracts should be compared with an advisor to understand what portion of the life insurance is tax-free.

How can I reduce business owner risks?

Life Insurance. Start-ups and smaller companies are especially vulnerable to potentially devastating financial risk because they often lack considerable company sophistication and in-house risk-control expertise. We will help you gain control of your financial trouble.  We help business leaders provide appropriate life insurance to pay off debts and the mortgage, educate the kids, and provide income for a spouse or a disabled dependent.

Disability Income Replacement Insurance. We’ll review your need for income replacement insurance to help replace your paycheque in case you get hurt or sick.

Key Person Insurance. We will assess your need for an insurance policy designed to hire the right person if a key individual becomes sick or dies.

Critical Illness Insurance. A critical illness can wipe out a small business if business owners develop cancer, a heart attack, or a stroke. We have many plans to protect you from such concerns.

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.


How does Disability Insurance protect a Buy-Sell Agreement?

Disability Buy-Sell Agreements


A detailed look at two ways to guard against potential liabilities when a significant shareholder becomes disabled.

Two strategies protect shareholders against the liabilities of another significant shareholder becoming disabled.

Criss-Cross Buy-Sell Agreement

  • The agreement provides for a mandatory sale and purchase of an interest in the corporation once a shareholder has been disabled for a specified period.
  • Shareholders own disability insurance on each other to fund the purchase.
  • The agreement guarantees to purchase the disabled partner’s business interest throughout the policy’s payout period.
  • Premiums are paid with after-tax income.
  • Policyowners receive tax-free disability benefits.
  • An allowable reserve can offset capital gains on the asset’s sale for a time if the entire proceeds are not collected upfront.
  • Personally owned income replacement insurance is generally purchased in addition to the above coverage to provide an income (in addition to the buy-out benefit) to the disabled shareholder.

Corporate Share Redemption

  • The agreement provides for the mandatory redemption of the shares once a shareholder has been disabled for a specified period.
  • A taxable dividend, equivalent to the total amount of the purchase price, less the paid-up capital value of those shares, is deemed to have been received in the year in which the redemption of the shares takes place.
  • The dividend is subject to the Dividend Tax Credit and the Alternative Minimum Tax rules.
  • A lump-sum disability insurance contract owned by the corporation covers the funds required for the redemption.
  • The corporation could pay out an amount in addition to the redemption value to cover taxes payable by the disabled shareholder.
  • A promissory note can cover shortfalls in payment

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.

How can life insurance protect key business people?

Every business has one or more key players who lead.  Our economy depends on small family businesses which employ millions of people. If family businesses are to remain successful in our fast-paced economy, they must address the following issues:

Continuing success depends on leadership.  Continued success may depend on the leadership of the founding owner. If the owner desires to retire in 10 or 15 years, succession planning may be necessary today. Have you made plans to sell, or to pass the company on to the children or another successor?

Talk to your CA or tax lawyer to assess possible capital gains tax liabilities. If these liabilities exist, life insurance policies may be able to solve the problem in advance; purchased individually or jointly on the lives of the owner and/or the spouse while in reasonably good health.

If the owner of the company will depend on the company’s resources for retirement income, it may need to be budgeted as an ongoing disbursement during his or her retirement via a salary or dividend payments.

Groom successors to take over the business. An immediate (as well as long-term) successor can be groomed to take over the company, just in case the owner suffers a disability. Owners need to ask, “What would happen if I was laid up and incapable of giving directives? Would that force a quick sale of my company?”

To prepare for the potential event of a disability, owners should make sure that they are covered with both disability and critical illness insurance to replace income or deliver a lump sum emergency benefit.

What could happen if a business owner died unprepared? Life insurance can meet capital needs and cover liabilities such as company debt. Acquiring loans may be harder for unknown successors. Servicing debt could get costly if interest rates go up. Life insurance can wipe out company debt entirely upon an owner’s death, spouse’s death, or after both have died (using a joint-last-to-die policy).

Owners need to make sure that key family members actively working in the company (including active owners), and important employees, are covered with key-person insurance. If a key-person is afflicted with a disability or dies, the business may need money to acquire replacement help.

Agreements direct the insurance benefit’s use. Buy-sell agreements are essential for partnerships and many corporations. Often family members in joint ventures will overlook this planning device as they feel they can solve business issues when one dies or is disabled. Without proper pre-planning, businesses could get bogged down in conflicts, and may not have enough capital to buy out the interest of a partner. Back up the agreement with life insurance, disability insurance, including critical illness insurance coverage to solve these often hidden business risks.

Can you pay your bills if disabled?

Disability insurance (DI) can be purchased from a life insurance company to cover up to 80% of your regular income (or more) if you become disabled. This coverage is referred to as “income replacement” insurance.

If you work for a corporation, your employer may offer a group plan with short-term disability (DI) coverage. Could you review it to determine the coverage period and ensure it meets at least 60% of your current income for longer than three months?

Additional DI can be purchased (and owned privately) to extend the income payment period and increment payments to the increasing cost of living. Some policies increase paycheques according to the consumer price index (CPI).

If self-employed, If you have dependents, it is essential to ensure that you have income replacement insurance to pay your expenses until age 65. Caring for your own needs is also wise if you are single.

Consider the following questions about where the money might come from if you could not earn a living for a month, a year or forever.


  • Would withdrawing part or all of your retirement savings and money on deposit at the bank to use as income when convalescing affect your retirement?
  • If you need to access the equity or your home to create an income, will this deplete your net worth?
  • Could you borrow money if your banker knew you might never work again?
  • Could you live on your spouse’s income?
  • Could you ask a parent, sibling or friend to loan you money? How would you repay it?
  • Would you rely on the government to pay a disability income that lasts until you retire?
  • Would you want to sell your house or cottage?

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide effective business strategies relative to succession or an estate.