How to Protect your Family from the Financial Risks of your Business
Running your own Business or Professional Practice can be one of the most satisfying things one can do for a career, but it can also be filled with long hours, sleepless nights and stressful days. In fact, it is the only career I know, where you are willing to work 60 hours per week for yourself, so you do not have to work 40 for someone else! But how does being your own Boss affect your family, and does your business bring undue Risk to your Family and their Financial Future?
So what are the Financial Risks of your Business, and how could they negatively Impact your Family?
After years of working with successful business owners and professionals, we have identified 5 main areas where we can best protect you and your family from the financial risks of your business.
Risk 1, becoming Disabled while running your Business…
Many of our clients have been so active in their businesses that they almost forget that a Disability is a real event that could happen. In fact according to a Stats Can report published in 2017 showed that Canadians aged 40-65 had a 15% chance of having a prolonged to severe disability. In this study, we are not talking about breaking an arm or a leg but a prolonged disability that lasts for longer than 6 months.
If you were to have a disability throughout your prime working and earning years, what kind of an impact would that have on not only your ability to earn an income, but to pay the office bills, or any overhead that may be required for the business to continue while you recover? Many companies we work with, see the value in having a Health and Dental Plan, but have you checked your maximum monthly limits lately, and does it cover any office overhead expenses to keep the business thriving throughout your time in recovery?
- Disabilities do happen to really nice people
- Your Company or Association Health and Dental Plan may not be nearly enough
- It generally costs 3% of your Income and is a Tax Deductible expense to the business when set up properly
- An Office Overhead Expense Rider on your DI Policy will also pay Salaries and Rent if you suffer a Disability
Risk 2, experiencing a Critical Illness in your Prime Earning Years…
When we have talked with our clients about the level of stress they feel as being the Captain of the Ship, the resounding answer was common, they felt much more stressed today then they felt 5 or 10 years ago. This is worrisome as the Heart and Stroke foundation of Canada has statistics showing that 1 in 2 men and 1 in 3 women will develop Heart disease in their lifetime. And from the Canadian Cancer Society, their data shows that 2 in 5 Canadians will develop some form of Cancer within their lifetimes. So the facts are real, but still many of the clients we have worked with have not considered Critical Illness Insurance as a part of their Business Continuation program.
But the news is not all Bad, surviving a Critical event with Canada’s advanced medical system is much higher today, then it has ever been in the past. So having a Stroke, Heart Attack or Cancer is not the end, but will your business survive if you have to take off 6-12 months in recovery, or will you have to drain any financial resources within the company to keep your business afloat? How would this event affect your company or your family’s financial situation? Would you not want to focus on getting better, instead of the financial stress that could hinder your recovery?
- Cancer, Strokes and Heart Attacks have had an impact on at least one person we all know
- You need to create a financial buffer, so you can focus on recovery and not finances
- When set up properly through a Split Dollar Critical Illness Strategy, you can extract a portion of the profits out of the corporation Tax Free
- If your CI Policy is set up properly and you stay healthy throughout your career, you can receive the Premiums back Tax Free
Risk 3, having a Key Person within your Organization become Disabled or Worse…
What if your business heavily relied on the efforts of one or two Key Employees who really are the foundation of revenue or skill sets. Think of an organization who’s Top Salesperson accounted for 50% of the annual revenue, and that salesperson were to become Disabled, Critically ill or even worse, passed away in some unfortunate accident or event. How would your business survive initially?
Would you have to find a new replacement, one who may take years to get back up to the sales level of the previous employee? How would the event impact your near term cash-flow? Would your creditors and customers be worried? Would you feel obligated to continue the income and maybe even bonuses to the employee or their family? By using a well crafted Key Person Policy, you can protect your business from the loss of a major financial cog in your business. Whether it may be from a Disability, a Critical Illness or even Death.
- Replacing the expertise and knowledge of an essential individual can take time and money and can jeopardize the continuity of the business.
- If a Key Employee had to take 6 months off of work to recover from a Heart Attack, would your business suffer significant financial loss?
- If a Key Person within your organization were to pass away, how long would it take to hire and train someone to take over the role?
- The benefit received by the untimely passing of a key employee is received by the Corporation Tax Free and can buffer the financial loss until a new person is brought on board.
Risk 4, safeguarding your Partnership and ensuring business continuity…
In many of the companies we work with, a Partnership or Shareholders form the core part of the ownership of the Business. Whether a Business started as a Partnership or whether it grew and shared the business with key employees, investors or partners, the need to protect everyone in the room is never overlooked by a good Lawyer. But how would you fund a partner or shareholder buyout in the event of a death in the organization? There are many ways to satisfy the financial component of a partnership agreement, you could take the money out of the corporation if there is enough there, you could borrow the money from the bank or you could use a Joint Term Life Insurance policy.
In a partnership, understand if one of the partners passes away, the surviving spouse of that partner is typically the new shareholder under Family Law. This can create a world of problems, because if the spouse is not paid their fair market value of the share, they could technically come in and work in the same role as the deceased partner. In most scenarios, this is not a viable option. So what can you do to protect the business? Purchase the share with funds from the business, take out a loan to purchase the share, or set up Partnership Insurance to fund the share buyout.
- If you are in a Partnership with one or more people, you need to protect your business and family with a Partnership Agreement
- Using Life Insurance to fund the buyout of a Partner is the most efficient way to fund a Partnership Agreement
- The surviving spouse or children have the right to come into the business in the event there is not a properly funded Agreement
- Life Insurance proceeds are paid Tax Free to the Capital Dividend Account to purchase the outstanding share
Risk 5, keeping all your assets in the Business…
In the early years of building a Business or Practice, it is more than likely that most of the retained earnings are left inside of the company to protect or prepare for a rainy day scenario. Retained earnings are a mixed blessing for business owners. On one hand they represent the companies success and profitability, but on the other hand it can be a challenge to take those earnings out of the business without incurring a large tax bill. With the new Federal Budget introduced in 2018, passive income which resides within the business will be subject to new taxation rules, and simply letting the money sit inside of the corporation will not be as attractive as it has been in the past.
But there is good news, thankfully, cash value which is sheltered inside of a life insurance policy is not considered passive income by CRA, thus allowing policy owners to grow their corporate wealth inside of a policy without triggering a tax event due to the new passive income rules. And one of the most attractive reasons why you would want to use a Life Policy to grow and shelter your earnings would be your ability to access the capital if you need it to pay salaries, or buy new equipment or technology. So the capital is not locked away inside the policy and unavailable, it simply forms another asset within your small business or corporation which is not subject to the new taxation rules introduced this year. Also, a small business owner or corporation should consider the use of an Individual Pension Plan or (IPP) for short. As the tax laws continually evolve, it is necessary to consult with a professional who focuses on all of the evolving trends and opportunities for small businesses in Canada.
- The 2018 Federal Budget penalizes through higher taxation, a Business owner from leaving Passive Income inside the business.
- You can set up a Universal Life Policy, and cover the life insurance needs of the business, and at the same time, shelter and grow excess income without triggering any taxable events.
- Maximize your RRSP contributions, and invest in segregated funds to protect them from creditors and lawsuits
- Consider setting up an Individual Pension Plan to invest over and above the limits of an RRSP
To sum it all up…
It should be fairly obvious at this point, that my number one passion is in the field of Insurance and Risk Management, and how to use it to protect your family from the financial risks of your business. Over the last 15 years I have personally delivered millions of dollars to the beneficiaries in my practice, which has allowed the surviving partners and families to deal with the event, and not have to worry about the financial impact to them or their business. Through proper planning, businesses were saved and families were spared of the financial crisis of the loss. I would love to have the opportunity to help you as well, whether it is simply to review what you have in place, or to discuss any of the strategies which are listed above. It is my business, and it is my pleasure…