Critical Illness Strategies for Business Owners


Philip Setter is an insurance and investment professional based out of Calgary, Alberta. He is also the founder and managing partner of Business Critical – a multi-discipline advisory firm focused on corporate tax strategies.

Working with Business Critical as your business advisors and tax strategists will give you a clear overview and direction for your business. Their focus is on education, transparency, and providing quality service customized to your unique corporate needs. They aim to build a long-lasting and trusting relationship with each of their clients.

When did you get into the insurance industry and what was your motivation?

I started in the insurance industry back in April 2016 with a company called Combined Insurance. At the time, I had just sold a construction company and was looking for new opportunities in a different field of work. I had always wanted to transition into a more white-collar industry and Combined seemed like a good fit for me at the time. What thrilled me about the financial industry is that there is never a shortage of learning and there is an endless amount of possibilities to focus and build on. These kinds of opportunities and the potential for growth compelled me to stay in the industry and continue expanding my knowledge base in this area.

Do you feel as if critical illness insurance is a misunderstood product?

It is definitely an underutilized product and I believe that most consumers either do not understand it or see the value. The difficulty with any consumer, whether they are from the family market or corporate market, is that the abundance of different types of insurance available makes it very overwhelming to decide on which will be the best for them. Life insurance is usually the trigger for most consumers to start the conversation about risk management, but the problem is that we usually only have so many dollars that we can allocate to insurance. In a perfect world, we would be able to afford every type of insurance to be protected in every possible scenario, but that is not realistic to the average consumer. At the end of the day, establishing what your most important needs are and establishing a realistic budget is the first step to determining the best products for you.

How is Critical Illness underwritten compared to Life Insurance?

Critical illness is underwritten in much the same manner as life insurance with a few differences.

It will still be a fully underwritten plan and, in most cases, there will be a medical and possible blood profile. The main difference is that for a critical illness policy, they will be looking more closely at hereditary issues, history of family critical illness, and any current critical illnesses.

How can Critical Illness be used to extract retained earnings?

Extracting retained earnings via a critical illness policy is the most exciting part and ties in with the second question regarding whether or not critical illness is a misunderstood product. When consumers are faced with different insurance products that are a negative carry on their balance sheet, they start to look at them with much more criticism. However, when you combine an insurance product with a tax strategy, it expands the opportunities for business owners.

Business owners that are starting to retain surplus cash within their corporation run into many different problems. With cash in their corporation, they expose themselves to creditors and lawsuits from any of their business operations. If selling their company and utilizing their personal lifetime capital gains exemption (LCGE) was a priority for them, then the surplus cash retained could make them ineligible to take advantage of the $848,252 LCGE (current as of 2018).

At this point, they could either pay out salary or dividends to the shareholders to reduce the risk potential, but as the marginal tax rate increases to up 54% in Canada, the tax implication is quite high and not as beneficial to the business owner.

Business owners could also leave the cash in the corporation and direct it towards investments, but the tax rates on that can be extremely high – up to 50.67% on interest-bearing investments. Another issue that we have seen moving forward from the 2018 Federal budget changes is the reduction a business will have from their small business deduction limit when they have passive investments over $50,000/year in their corporation.

One of the strategies we leverage at Business Critical is the use of a jointly owned critical illness insurance policy for the purpose of extracting retained earnings. It works because there are multiple components that are jointly owned by the shareholder and the corporation. Each party pays for their portion of the policy with their after-tax dollars, whether that be personally or corporately. The magic happens when you utilize a return of premium rider on the entire policy, and after a certain period, the entire amount is returned to the shareholder tax-free. This enables the shareholder to transfer profits out of his or her corporation that he or she would normally be required to pay high personal tax on.

This video, by Business Critical, reiterates fundamental points regarding split dollar critical illness policies.

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