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Critical illness insurance for businesses - DFSIN - SFL

Critical illness insurance for businesses

An entrepreneur’s financial reality may involve elements that are very different from those of other individuals, especially when it comes to business risks associated with personal health.

April 26, 2022

Some insurance products are specifically designed to protect an incorporated company from the consequences of a critical illness striking a company owner or shareholder. Also available for key employees who may not be shareholders*, such products can provide coverage that offers both tax efficiency and financial benefits.

Here’s an overview of these “executive health plans.”

*Note: if the employee is not a shareholder, the tax authorities may deem the payment of the health benefit to be a taxable benefit received from employment. As the determination of the value of this benefit is a question of fact, clients should seek independent tax advice in this regard.

Table describing the executive health plan in four points.
Point one.
What is an executive health plan for?
If a shareholder (or key employee) could no longer work due to a critical illness…
On one hand, the company would have access to a (non-taxable) lump sum to: carry on with its business plan; keep up with loan payments, thus reassuring creditors, clients and suppliers; limit losses by hiring replacement staff; and buy back shares held by the ill shareholder.
On the other hand, the shareholder or key employee could receive a portion of this sum from the company to: maintain the family’s standard of living and aid in the patient’s recovery. This amount would be taxable.
Point two.
How does an executive health plan work?
This type of insurance pays out a lump sum in the event that the insured is diagnosed with a covered illness.
An example
Nathalie, age 45, an Ontario resident and shareholder/owner of ABC Consulting Inc. Nathalie and her company set up a plan for a term ending on her 75th birthday, with a critical illness insurance amount of $500,000.
The company pays $7,135 per year and Nathalie pays $5,485 per year.
First scenario. When Nathalie turns 60, the company will have paid $107,025 and Nathalie will have paid $82,275. If Nathalie becomes ill, her company receives $500,000 non-taxable. If she remains healthy, Nathalie receives $189,300, i.e. all of the premiums she and the company jointly paid. Note that, as the plan ends when Nathalie reaches age 75, she cannot receive the health benefit of $189,300 at age 60 without tax consequences, unless the company no longer needs the coverage.
Note 1
In order to simplify the presentation, the death benefit has not been illustrated. Should Nathalie pass away before any critical illness benefit is paid, her company would receive the higher of the following payments:
·       100% of all premiums paid or
·       25% of the insured amount.
Note 2
As the company and the shareholder will jointly hold the insurance contract, a legal document must be drafted to stipulate the terms and conditions of the agreement. You should seek assistance from legal and taxation advisors when planning your EHP strategy.
Second scenario. When Nathalie turns 75, the company will have paid $214,050 and Nathalie will have paid $164,550. If Nathalie becomes ill, her company will receive $500,000 non-taxable. If she remains healthy, Nathalie will receive $378,600, i.e. all of the premiums she and the company jointly paid.
Point three.
What critical illnesses could be covered?
Some examples.
Cancer / tumour
• Cancer (life-threatening)
• Benign brain tumour
Cardiovascular problems
• Aortic surgery
• Heart attack
• Coronary artery bypass surgery
• Heart valve replacement or repair
• Stroke
Neurological problems
• Bacterial meningitis
• Dementia, including Alzheimer’s
• Motor neuron disease
• Multiple sclerosis
• Parkinson’s disease and atypical parkinsonian disorders
Major organs
• Major organ failure, on transplant waiting list
• Kidney failure
• Major organ transplant
Accidental and functional injuries
• Acquired brain injury
• Blindness
• Coma
• Deafness
• Loss of limbs
• Loss of speech
• Paralysis
• Severe burns
• Aplastic anemia
• Occupational HIV infection
Long-term care
The list of covered conditions may vary depending on the policy.
Point four.
Would other coverage be needed?
An executive health plan generally includes 3 components.
A critical illness benefit paid to the company if the executive becomes ill.
A health benefit
paid to the executive if he or she remains healthy.
A death benefit paid to the company if the executive dies.
This type of insurance does not pay a critical illness or death benefit directly to the shareholder or key employee or to his/her family. It functions as a complement to individual insurance.

The following sources were used to prepare this article:
Desjardins Insurance
,Executive Health Plan (EHP).”