Why Business Owners Need Critical Illness Insurance
Business owners often plan for the death of key persons or the succession of retiring founders, but many overlook a very important piece of the puzzle – what happens if a key person or owner is critically injured but does not pass away? This person is unable to work for a time and may not return to work but is still an active shareholder and important part of the company. In addition to the loss of revenue that person brings in, what happens if the other partners need to buy them out?
For these reasons, critical illness insurance is the solution.
The stakes are high in Canada, where statistics reveal that the likelihood of experiencing a significant injury or illness without fatal consequences is considerable. However, one of the main challenges business owners encounter is the difficulty in qualifying for disability insurance. Traditional disability insurance policies require proof of consistent income. The nature of entrepreneurship often involves fluctuating revenues, especially in the early years of establishing a business or during periods of market volatility. This variability can disqualify many business owners from traditional disability coverage, leaving them exposed to great financial risk.
The absence of disability insurance amplifies the need for a financial cushion, which can be provided by critical illness insurance. Should a business owner be diagnosed with a critical illness, the financial implications can extend far beyond personal medical expenses. The ability to maintain business operations, retain employees, and manage ongoing expenses becomes jeopardized. Critical illness insurance steps in to fill this gap, offering a lump sum payout that can be instrumental in keeping the business afloat during challenging times.
The payout from a critical illness insurance policy can also serve as a resource for buying out a shareholder should they be unable to continue their role in the business due to their illness. This flexibility ensures that the business can make necessary adjustments to its ownership structure without financial strain.
Beyond the immediate benefits of providing financial relief in times of crisis, critical illness insurance also represents a strategic decision for the overall financial health of the company. Premiums paid towards a critical illness insurance policy can be considered a company expense, offering tax advantages depending on the specific structure and financial practices of the business. Also, investing in critical illness insurance underscores a commitment to long-term planning and risk management. It demonstrates to employees, shareholders, and potential investors that the business is prepared to mitigate unforeseen challenges, thereby enhancing its stability and attractiveness.
What is Critical Illness insurance?
Let’s take a closer look. Critical illness insurance provides a lump sum of money that you can use in any way you see fit (e.g. for a treatment, modifications to your home, change of life style) after you have been officially diagnosed with an illness named in the policy and have survived the waiting period.
As for limits, it is usually up to $2M but can be impacted by your income to be lower or higher depending on your situation. Critical illness insurance is stackable within reasonable limits (but no multi-million dollar policies are issued to somebody with a low income).
It is important to know that you can choose between being covered for three major critical illnesses: heart attack, cancer, stroke (which drive the majority of claims), or for 20+ critical illnesses including Multiple Sclerosis, major organ transplant, loss of speech, etc. Work with a broker to determine the best coverage for you and your company’s needs.
What Types of Critical Illness Products Exist?
There are three main types of critical illness insurance products: standard, simplified issue, and guaranteed issues.
- Standard: Underwritten medically and offers the best rates. Ideal for healthy applicants.
- Simplified Issue: A questionnaire replaces the medical and fluids are not drawn. A faster application process and ideal for those whose age or health would cause issues in obtaining a standard policy. Rates are often higher than standard.
- Guaranteed Issue: Anyone can qualify but this has a high premium and low coverage. The applicant must also survive a long waiting period in which the benefit will not pay out (but the premiums are returned to a beneficiary if necessary).
There are some simplified issue critical illness products on the market, and a limited range of guaranteed issue ones as well. One thing to consider is obtaining a life insurance policy with a critical illness rider, which may suit your company’s needs.
The best way to choose the best critical illness insurance policy for you, is to speak with a broker who can help determine the ideal policy based on your identified needs.
Options and Tax Implications
There are several ways to own a critical illness insurance policy. Let’s look at them…
- Option 1: Personally-owned critical illness insurance: An individual owns and pays for a critical illness insurance policy (including self-employed owners of an unincorporated business). Benefits are payable to the individual insured.
- Option 2: Personally-owned critical illness insurance – structured as an employee benefit: An employee owns a critical illness insurance policy and his/her employer pays the premium. Benefits payable to the individual insured (employee).
- Option 3: Corporately-owned critical illness insurance: The critical illness insurance policy is owned by the corporation and the premium is paid by the corporation with benefits paid to the corporation (key person insurance).
Critical Illness Insurance and Taxes
The overview below provides a look at how premiums and payouts are treated for each of the scenarios described above.
| Option 1: Personally-owned critical illness insurance | Option 2: Personally- owned critical illness insurance – structured as an employee benefit | Option 3: Corporately-owned critical illness insurance | |
| Deductibility of premium | The premium payment is considered a personal or living expense for income tax purposes and isn’t deductible. | The cost of the premium payment is deductible to the employer as a salary expense. | The premium payment isn’t deductible as a business expense. |
| Tax treatment of premium payment for insured individual | Not applicable | The premium paid by the employer on an employee-owned policy must be included in the employee’s income as an employee benefit. | The premium payment won’t be considered taxable income to the employee. |
| Critical illness insurance benefit | Lump-sum critical illness insurance benefits aren’t taxable. | Lump-sum critical illness insurance benefits aren’t taxable. | Lump-sum critical illness benefits received by the corporation aren’t taxable. If the critical illness benefits are subsequently paid to the employee (key person) or shareholder, the amount paid will generally be taxable to the recipient either as an employee or shareholder benefit or a dividend. |
Source: Canada Life
Note that the Canada Revenue Agency has not provided a formal response to the joint submission by CLHIA and CALU regarding the tax treatment of return-of-premium benefits, which may be included in a critical illness insurance policy. The tax treatment of optional return-of-premium benefits is subject to interpretation.
Disability Insurance Vs Critical Illness Insurance Premiums for a Business Owner
While disability insurance can be very difficult to get for business owners, it is still important to know about it – and to obtain it where possible. Let’s take a closer look.
Critical illness insurance and disability insurance are both essential tools for financial planning, especially for business owners in Canada. Each type of insurance serves a different purpose and offers unique benefits, but they also have their respective drawbacks. Understanding the differences, pros, and cons can help business owners make informed decisions about their insurance needs.
| Critical Illness Insurance | Disability Insurance | |
| What It Is: | Critical illness insurance provides a lump-sum payment if you are diagnosed with one of the specific illnesses covered by your policy. | Disability insurance provides regular payments if you are unable to work due to a disability caused by illness or injury, covering a portion of your lost income. |
| Pros: | • Lump-Sum Benefit: You receive a one-time payment that can be used for any purpose, such as covering medical costs, paying off debt, or compensating for lost income. • Flexibility: The payout offers financial flexibility during a challenging time, allowing you to focus on recovery without financial stress. • Coverage for Serious Illnesses: Specifically designed to cover severe health conditions that might not lead to disability but require significant medical attention and recovery time. |
• Income Replacement: Offers a continuous flow of income, typically a percentage of your pre-disability earnings, until you can return to work or for the duration specified in your policy. • Broader Coverage: Covers a wide range of health issues. • Support for Longer Periods: Designed to provide financial support for extended periods, even potentially up to retirement age, depending on your policy. |
| Cons: | • Limited Coverage: Only specific diagnoses are covered, so if your illness is not on the list, you won’t receive a benefit. • No Replacement Income: Unlike disability insurance, critical illness insurance does not provide ongoing support to replace lost income over time. |
• Waiting Period: There’s usually a waiting period before benefits start, during which you must be disabled and not working. • Percentage of Income: Only replaces a portion of your income, not the full amount, which might not suffice for all your financial needs. • Proof of Disability Required: You need to prove your inability to work due to your condition, which can sometimes lead to disputes with the insurance provider. |
For business owners in Canada, choosing between critical illness insurance and disability insurance—or deciding to have both—depends on your specific needs, your financial situation, and your risk tolerance. Work with a broker to help you choose the best option.
Critical Illness Insurance, Sample Rates
Sample numbers from Ivari and Manulife for critical illness insurance show that for $300,000 in coverage, an applicant could pay…
| Female applicant | Male Applicant |
| $194.23/month to cover four illnesses | $208.71/month for four illnesses |
| $203.87/month for 24 illnesses | $228.68/month for 24 illnesses |
Guaranteed renewable policies do experience a premium increase over the stated term, but renew without proof of health, which can be ideal to prevent lapses between policies. Each insurer has their own wording and exclusions; be sure to work with a broker so you can fully understand the terms and conditions of your policy.
Critical Illness for Business Owners: Summary
For business owners, the importance of critical illness insurance cannot be overstated. Being diagnosed with a serious illness can not only take a physical and emotional toll but also a substantial financial one. As a business owner, your ability to work directly impacts your business operations and financial stability. Critical illness insurance provides a crucial safety net, offering a lump-sum payment that can be used to cover unexpected medical expenses, maintain your business, or even compensate for lost income during your recovery period.
At LSM Insurance, we understand the unique needs of business owners in Canada. Our experienced brokers are committed to finding the best coverage options for your needs. We pride ourselves on working with a broader range of insurance companies than many other firms. This extensive network enables us to offer tailored solutions that align with your specific needs and circumstances, ensuring you receive the most comprehensive protection available.
Don’t let an unexpected illness derail your life and business. Reach out to LSM Insurance today. Our team of dedicated brokers is ready to guide you through the process, helping you secure the peace of mind that comes from knowing you’re protected. Contact us to explore your critical illness insurance options and take the first step towards safeguarding your future.
