Most businesses with multiple owners have a shareholders’ agreement. Some are tight, up to date, and reviewed regularly. Most are not.
That’s a problem. Because when a shareholder passes away or becomes disabled, things get real—fast. Who buys the shares? With what money? And what if that person’s spouse or kids now hold ownership in a business they’ve never worked in, with partners they didn’t choose?
A buy-sell clause can prevent that mess. But it only works if there’s money to back it up. In most cases, there isn’t. The company either has to take on debt, pull from operating cash, or liquidate assets—all of which hit the business at exactly the wrong time.
That’s where insurance steps in.
A life or disability policy on each shareholder, owned by the corporation or a holding company, creates an immediate funding solution. It’s clean, liquid, and tax-efficient. And it means no scrambling for capital, no awkward negotiations, and no surprises for the surviving shareholders or the deceased’s family.
Keep the Valuation Moving with the Business
One mistake that happens often: the business grows, but the coverage doesn’t.
A buy-sell clause written five years ago might be based on a valuation that’s way out of date. If you’re relying on insurance to fund the buyout, and that number is too low, someone’s going to come up short.
It’s worth reviewing coverage at least annually—ideally as part of a broader review of the agreement itself. If the company’s value has changed, the coverage needs to follow suit. Revisiting your valuation regularly—especially after major revenue shifts or shareholder changes—is a valuable practice, even if an exit isn’t on the immediate horizon.
The Tax Play Most Owners Miss
When a private corporation receives a life insurance payout, the death benefit comes in tax-free. But there’s more to it than that. The benefit also creates a credit in the Capital Dividend Account (CDA)—a notional account that lets the company pay dividends tax-free to the estate or shareholders.
Used correctly, this is a powerful tool in post-mortem planning. It can help avoid double taxation on the shares of a deceased owner—something that’s far more common (and costly) than most people realize.
This isn’t theory. It’s a practical planning move that’s built right into Canada’s tax code—but it only works if the right structure is in place. Structure determines who receives proceeds and how they flow through the CDA.
Insurance That Helps You Grow
Beyond shareholder issues, insurance also has uses while everyone’s still around.
For example: a corporation can assign a life insurance policy as collateral for a loan. This can unlock better lending terms or free up access to capital that would otherwise require hard assets as security. It’s not flashy, but it’s useful—especially for companies that are cash-flow positive but asset-light.
There’s also key person insurance. If you have one or two people whose absence would materially damage operations or revenue, you can insure their lives to buffer the impact of a sudden loss. It’s not about replacing the person—it’s about giving the business breathing room to recover. Many lenders offer preferred rates when insurance is used to secure business loans—ask your advisor how.
Make Sure It Does What You Think It Does
A policy is only useful if it’s set up right. Ownership, beneficiary designations, corporate structure—these details matter. And they should be reviewed anytime there’s a change in shareholders, valuation, or long-term plans.
Insurance shouldn’t drive the strategy. But when the strategy is clear, insurance can be a low-friction way to make sure the execution holds up under pressure.
Talk to your advisor. The good ones know that insurance isn’t just a line item—it’s leverage, when you need it most.
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