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Should you take out a life insurance policy to cover your business loans?
If you’re taking out a business loan to expand or purchase equipment, you may consider covering the amount of the loan with a life insurance policy. This type of policy is referred to as collateral life insurance. There are two reasons for purchasing this type of life insurance.
First, lenders may require that you purchase life insurance to cover the loan. Lenders recognized that principals are the driving force behind generating income for the company and that the loss of a principal may cause them difficulty in recouping their loan. Requiring life insurance on the owners is an easy way to guarantee their loan.
Secondly, even when life insurance is not required by the lender they may still require the personal guarantee of the business owner. In the event of the death of the owner the lender may demand repayment requiring substantial liquidation of business assets. Alternatively because the loan is personally guaranteed, they may attach their debt repayment to the deceased’s estate. Life insurance coverage for the amount of the loan can ensure that your business and estate remain untouched by creditors for business loans.
Can you tax deduct your premiums for business loans?
Deducting your life insurance premiums is generally not allowed by the CRA in Canada. There is however a specific set of four conditions under which your business may deduct the life insurance premiums:
- The lender requires the loan. This is normally interpreted to mean that the lender requires the loan in writing – a verbal request is insufficient. A corollary to this is that the business will need to own the policy.
- The loan interest would be considered tax deductible.
- The policy is assigned to the lender.
- The lender must be a restricted financial institution.
As these are Canada Revenue Agency requirements for tax deductions you should consult with your business accountant to determine whether or not your business loan life insurance meets these criteria.
Types of business loan life insurance
Determining the amount and types of life insurance is straightforward in most cases. As the life insurance industry typically works in $250,000 increments for their pricing, the coverage amount would be just the amount of the loan round up to the nearest $250,000.
Term life insurance would normally be used, with the term corresponding to the duration of the loan. If the loan is to be paid off over 5-10 years, then a 10 year term policy would often be your least expensive solution. If the loan is revolving or ongoing, then a 20 year term policy may be more appropriate.
With the amount and type determined, it’s simply a matter of running a life insurance quote and starting at the least expensive company. If the amount of coverage required is in the 7 figures than sometimes insureds are more comfortable paying a few extra dollars for a large life insurance company, but you should always compare prices to ensure you’re getting the least expensive larger life insurance company.
Questions? Would you like a quote? Feel welcome to contact us at 1-877-344-4011 or book a call with one of our life insurance specialists.
