Critical illness insurance provides a tax-free lump-sum payment if you’re diagnosed with one of several insured conditions like cancer, heart attack, or stroke. It can help you focus on recovery while managing financial commitments.
For business owners, choosing between personally owned and business-owned critical illness insurance is an important decision that may impact both personal financial security and business continuity.
Understanding the difference between personally-owned and business-owned coverage
Personally owned critical illness insurance is owned by you as an individual. You make the premium payments, and if you make a claim, any eligible benefit is paid directly to you. This provides financial flexibility to cover expenses such as medical treatments, household costs, or time away from work.
For example, meet Amanda, a self-employed consultant who is diagnosed with a critical illness. A personally owned critical illness insurance policy may provide a one-time lump-sum payment to cover medical treatments she’ll need that aren’t covered by provincial or territorial health plans, household expenses, and even income replacement during her recovery—all without affecting her business finances. This may help ensure that her family can maintain their standard of living, mortgage payments continue without disruption, and additional medical services, such as physiotherapy or specialized care, are accessible.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Business-owned critical illness insurance is held by the business, with the company making the premium payments. If a claim is made and approved, the benefit is paid to the business, which can use the funds to help support operations, hire temporary staff, or cover other financial needs while the insured person recovers.
For example, take James, Sarah, and Alex who run a small accounting firm together. To protect their business, they bought business-owned critical illness insurance in case one of them got seriously ill.
When James was diagnosed with cancer, the benefit paid out a lump sum to the business. This money helped the business cover office expenses, hire a temporary accountant, and keep the business running while James focused on his treatment and recovery. The insurance gave them some financial stability to help keep things running as smooth as possible during a difficult time.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Tax implications
Premium payments for personally owned policies are generally not tax-deductible, but the benefit received is typically tax-free. This may allow policyowners to use the lump sum as needed without additional tax liabilities.
With business-owned policies, generally, premium payments aren’t tax deductible but are received by the business tax-free.
When is personally owned critical illness insurance preferred?
The choice to go with a personally owned critical illness insurance policy can involve several factors:
Medical expenses
Personal policies can cover costs for treatments, therapies, or medications not covered under Canadian provincial or territorial health plans. This could potentially include specialized treatments abroad or private care options. A personally owned critical illness payout may help with the flexibility to explore these options.
Personal living expenses
Income replacement during recovery can be essential, especially for sole proprietors who lack employer-paid sick leave. The payout allows the insured person to help cover personal expenses such as mortgage payments, utilities, groceries, and daily living costs. This financial support can help while you focus on recovery rather than worrying about lost income.
Personal loan protection
A critical illness can lead to temporary or extended time away from work, making it harder to keep up with loan obligations. Personally owned critical illness insurance can assist in covering car loans, or other personal debts, helping to prevent defaults and protecting credit health.
Protecting a personal portfolio
Without financial support, individuals might be forced to liquidate personal investments or retirement funds to cover medical or living expenses, disrupting long-term financial plans. A critical illness insurance payout may help preserve investments and retirement savings, helping financial security for the future.
Funding insurance premium payments
If an illness is affecting your income, maintaining other insurance policies (e.g., life or disability insurance) may become challenging. A personally owned critical illness payout may cover ongoing premium payments, helping to ensure that existing coverage remains in effect and helping to secure your future financial plans.
When is business-owned critical illness insurance preferred?
The choice to go with business-owned critical illness insurance can also involve several factors:
Replacing a key person
If a key person in your business becomes critically ill, a business-owned critical illness policy can help cover the cost of hiring or training someone to temporarily fill their role. This may reduce the impact on your operations and help keep things running smoothly.
Business loan protection
If the person insured by the policy has a business loan, any eligible payout can be used to cover loan payments during their recovery. For example, it could protect against the foreclosure of business assets if loans go unpaid.
Business overhead protection
Running a business involves regular costs, like rent, utilities, and payroll. Critical illness insurance may help cover these expenses if the business owner is sick, helping ensure the business continues operating smoothly.
Small businesses, which make up a significant portion of Canada’s economy, can especially benefit from this. Many small businesses struggled and even closed during the COVID-19 pandemic due to financial stress. In fact, at the peak of the pandemic in May of 2020, 41.7% of small businesses (5 to 19 employees) laid off their staff. For medium-sized businesses (20 to 99 employees), the number was even higher at 47.4%.
Funding a buy-sell agreement
A buy-sell agreement helps if a business partner becomes critically ill. Insurance proceeds may allow the remaining owners or the family of the sick partner to buy their share of the business. This keeps things running without disruption and may help with succession planning.
Protecting business portfolio
Critical illness insurance may also protect the business’s savings and investments. Without it, you might need to dip into those funds to cover operating costs or recovery.
How your choice may affect your financial plans
Your decision between personally owned and business-owned critical illness insurance should align with your financial goals, like saving for retirement, planning your estate, or protecting your wealth. Here’s how it can impact each of these areas:
- With personally owned critical illness coverage, you will get a lump sum payment if you’re diagnosed with an insured illness. This money could help you with things like medical costs, daily expenses, or even to contribute to your retirement savings if you’re unable to work.
- With business-owned coverage, your business is usually the beneficiary of any eligible payout. It’s to help your business run smoothly by paying off debts, hiring temporary staff, pay rent, etc. This money can help your business keep running and generating revenue, which you can then decide to use towards your own retirement savings.
Estate planning
If you’re planning to pass on your business to family members or partners, business-owned critical illness insurance may help avoid putting the business at risk if you get ill. An eligible payout may cover business debts or help buy out a sick partner's share. On the other hand, personally owned insurance may help cover personal expenses, like taxes, and help make sure your loved ones aren’t financially burdened if something happens to you.
Wealth preservation
Business-owned insurance helps protect your business and its assets, but if you use business funds to cover personal health costs, it could limit the money available for growing the business or other personal goals. Misaligning your insurance choices could mean you’re either not protecting your business enough or you’re not securing your personal finances as much as you need for the future.
Additional best practices for making your choice
When choosing between personal and business-owned critical illness insurance, there are a few best practices to keep in mind:
Consult a professional
It’s a good idea to talk to your advisor. They can help you understand the pros and cons of each type of ownership and how it fits into your financial plans. Professionals may also help you figure out if you need both types.
Evaluate your business ownership structure
Think about how your business is structured. If you have business partners, business-owned insurance may help protect the company, and allow partners to buy out your share if something happens to you. If you’re the sole owner, personally owned critical illness insurance might be enough to cover your personal and business expenses during a critical illness.
Review policies regularly
Your needs might change over time, so it’s important to review your policies regularly. As your business grows or your personal situation changes, you may need to adjust your coverage to make sure it still fits.