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A stack of aligned wooden blocks representing a business life insurance audit.

Corporate Life Insurance Audit: Get Peace of Mind with an Actuarial Review

Written for Business Owners

Many small business owners view life insurance as a check-the-box item – set it up once and never think about it again. In reality, a well-designed life insurance policy is a dynamic tool that needs review and optimization to keep pace with your business and changing tax laws. A comprehensive audit can turn a basic life insurance policy into a powerful driver of growth, stability, and tax savings.

Weaknesses Exposed: What an Audit Can Reveal

Infographic describing the benefits of corporate life insurance audits: Enhanced Protection, Tax Savings, Optimized Growth, and Peace of Mind.

Many business owners view life insurance as a fixed expense. However, policies often contain hidden weaknesses that can compromise their value to your business.  A comprehensive audit can highlight these vulnerabilities, empowering you to maximize the benefits of your policy.  Some common issues an audit can uncover include:

Policy-Business Mismatch: Is Coverage Keeping Up With Your Growth?

Many business owners establish life insurance when their business is in its early stages. However, as your business grows and its value increases, the initial coverage amount often becomes inadequate. This leaves the business vulnerable should a key person pass away or become disabled. An actuarial audit can pinpoint these gaps, ensuring your coverage accounts for:

  • Loans: Coverage aligns with any updated loan or credit obligations.
  • Key Person Value: Protection reflects the current contributions of key individuals and the potential loss if they were no longer part of the business.
  • Business Valuation: The policy amount contributes to overall business valuation, especially for buy-sell agreements or succession planning.

Outdated Pricing & Assumptions: Could You Be Paying Too Much?

Insurance products and pricing undergo ongoing changes. Even if the market hasn’t shifted dramatically, your policy may now be less competitive than when initially set up. Additionally, initial projections about the policy’s growth may not reflect current conditions. An actuarial audit analyzes these crucial elements, helping to ensure:

  • Competitive Pricing: A thorough market analysis can reveal if similar or even superior coverage is available for lower premiums than the current policies’.
  • Projection Alignment: Policies with cash value components have underlying assumptions about investment growth. An in-depth audit assesses whether the policy is meeting those initial projections.
  • Legacy Policy Benefits: Some older policies might have valuable features or pricing that newer products can’t replicate. An audit identifies those advantages and helps you determine if keeping the existing coverage is the best strategy.

Product vs. Purpose: Is Your Policy Designed to Evolve With Your Situation and Goals?

Life insurance products offer diverse features and potential benefits. As your business grows, it’s crucial to ensure your policy remains aligned with your evolving situation and financial goals. An in-depth audit helps achieve this by:

  • Optimizing for Current Tax Laws: Certain policy structures offer more favourable tax outcomes than others under the current tax environment. An audit uncovers potential opportunities for income deferral, deductions, and tax-advantaged growth within the policy.
  • Maximizing Cash Value: If a business requires flexible access to cash, certain products offer better loan provisions or withdrawal options. An audit analyzes how well the policy’s cash value features fit your liquidity needs.
  • Retirement Planning Integration: For many business owners, life insurance policies can become part of a supplemental retirement income strategy. An actuarial audit can assess if the current policy is structured to maximize benefits in retirement.

Missing Riders: Are You Leaving Essential Protections on the Table?

Many business owners focus on the core death benefit of their life insurance policy. However, riders can significantly enhance coverage and flexibility. An actuarial audit can reveal crucial gaps and opportunities, such as:

  • Disability Waiver of Premium: This rider ensures your premiums are paid if you become disabled, preventing the policy from lapsing during financially difficult times.
  • Critical Illness Protection: A lump sum payment upon diagnosis with a critical illness can provide vital financial support for your business or personal expenses during treatment and recovery.
  • Additional Insured Riders: Covering spouses or other key employees safeguards family businesses or partnerships against unforeseen events.

Note: Riders typically involve additional costs. An audit helps you prioritize which riders offer potential benefits that outweigh the increased premiums for your unique situation.

Improper Beneficiary Designations: Are Your Intentions Clearly Reflected?

Ownership structures and business partnerships evolve. An audit ensures your beneficiary designations remain aligned with your business’s succession or continuity plans, minimizing confusion and protecting the intended payout of benefits.

  • Changing Business Structures: If you’ve reorganized your businesses, established holding companies, or added partners, your beneficiary designations might need to be adjusted to ensure the benefits flow as intended.
  • Estate Planning Alignment: Your life insurance policy may be part of your larger estate plan. An audit helps ensure your beneficiary designations work in harmony with your overall wealth transfer strategies.

Note: Even if you don’t believe your beneficiaries need updating, a quick review during an audit provides peace of mind knowing your wishes will be followed should the unexpected happen.

Underperforming Cash Value Growth: Is Your Policy Living Up to Its Potential?

Some life insurance policies have an investment component that builds cash value over time. This can be a valuable asset for your business. However, if your policy’s cash value growth is underperforming initial projections, an audit can help uncover the reasons and identify potential solutions. An audit can assess:

  • Market Performance: Has the investment performance within your policy met original expectations? External market changes may have caused deviations.
  • Fee Structure: Are the underlying investment fees within your policy eroding returns more than initially anticipated?
  • Potential Alternatives: If underperformance is significant, an audit can determine if redirecting those funds into other investment vehicles within or outside your policy might create better growth opportunities.

Note: Not all policies with cash value components are designed for aggressive growth. An audit helps you make informed decisions about maximizing this aspect of your policy based on its original purpose and your risk tolerance.

The Tax Side of Life Insurance Audits

Infographic titled "Corporate Life Insurance Weaknesses" identifying six hidden risks an actuarial audit can reveal.

Life insurance policies have unique tax implications for businesses, and those regulations can change over time. An in-depth audit helps you maximize the tax advantages of your policy while ensuring full compliance with current laws. It’s vital to collaborate with specialists possessing both actuarial and tax expertise to gain the nuanced understanding necessary for optimizing outcomes.

Premiums Are Generally Not Deductible

In most cases, businesses cannot directly deduct life insurance premiums as an expense. This maintains a balance within the tax code to prevent receiving both tax-free death benefits and deductions on the same investment. However, there are specific exceptions and complex situations where an audit can unlock potential tax advantages related to your policy.

Exceptions to Consider:

  • Loan Collateralization: If a loan specifically requires a life insurance policy with the lender as the beneficiary, premiums may become deductible. This requires careful analysis during an audit to verify eligibility.
  • Specialized Corporate Structures: In rare cases, specific corporate ownership structures for life insurance policies might create opportunities for tax optimization strategies. An audit in collaboration with your tax advisor can determine if this applies to your situation.

Note: Even if premiums aren’t deductible, an audit might uncover other ways to use your life insurance policy for tax benefits, such as tax-advantaged cash value growth or optimizing withdrawals and loans.

The Cash Value Advantage

Life insurance policies with an investment component (e.g., whole life, universal life) build cash value over time. This value can often be accessed by businesses for various purposes. An audit helps maximize this aspect of your policy by:

  • Evaluating Growth Performance: Is the cash value growth aligning with original projections? Market fluctuations or underlying fees might impact performance.
  • Unlocking Potential: An audit analyzes how to utilize the cash value as a potential source of liquidity for the business through policy loans or carefully structured withdrawals.
  • Tax Considerations: Tax implications for accessing cash value differ depending on how withdrawals or loans are structured. An audit ensures your strategy minimizes taxes while maximizing the benefit to your business.

Note: Building significant cash value can take many years. Policies primarily designed for maximizing protection might not have a large cash value component.

Corporate-Owned vs. Personally-Owned: Who Owns Your Policy Matters

The ownership structure of your life insurance policy has far-reaching implications, impacting taxation, estate planning, and your overall financial flexibility. An audit can help you analyze the pros and cons of each ownership structure to ensure alignment with your long-term goals.

Corporate-Owned

  • Premiums Paid by Business: Often simplifies accounting as the business pays the premiums.
  • Beneficiary Considerations: The business is typically the beneficiary. Most or all of the death benefit can be passed to shareholders tax-free through the Capital Dividend Account. A tax advisor is essential to ensure you maximize this benefit.
  • Changing Ownership: Transferring ownership to an individual or a related corporation may have significant tax consequences.

Personally-Owned

  • Individual Pays Premiums: The policy owner has more control over beneficiaries and distribution of benefits. 
  • Estate Planning: May offer estate planning advantages such as probate tax minimization or simplifying wealth transfer strategies.
  • Flexibility: If the business situation changes, a personally-owned policy can be more easily adapted to serve other financial goals since the individual has full control.

Note: Ownership decisions can be complex with long-lasting implications. It’s vital to collaborate with actuarial, legal, and tax specialists to assess your specific situation and the potential impact of changing policy ownership.

Case Study: From Loan Requirement to Strategic Asset

ABC Development, a well-established real estate development firm, secured a multi-million-dollar construction loan to jumpstart their latest mixed-use project. As is standard, the lender required a life insurance policy with the loan amount as coverage, in this case $2 million. ABC initially met this requirement with a simple term life policy, viewing it as a necessary expense.

Years later, the project was thriving, and ABC Development’s overall portfolio had grown considerably. An insightful review of their finances highlighted several new concerns, making a review of their life insurance coverage a top priority. A comprehensive life insurance audit revealed they were:

  • Underinsured: The project and ABC’s overall value had increased dramatically since they first took out the loan. The initial life insurance policy was now woefully inadequate to cover the potential financial impact of losing a key partner.
  • Missing Tax Opportunities: The firm had accumulated significant retained earnings and faced growing tax burdens. They needed smarter ways to shelter income and maximize deductions.
  • Changing Priorities: Their growing success put a spotlight on long-term planning for business continuity, potential buyouts, and leveraging assets in their retirement strategies.

The Transformation: Beyond Basic Coverage

Working with actuarial insights from Taxevity, ABC Development revamped their insurance plan:

  • Boosted Protection: Increased term life coverage aligned with the project’s value and the firm’s overall risk exposure, increasing coverage to $5 million, protecting loan obligations and their growing business.
  • Added Cash Value Component: Introduced a strategic whole life policy to supplement the term policy. This initiated a tax-advantaged cash value asset potentially generating $200,000 over the next decade, accessible through loans or withdrawals with favourable tax treatment.
  • Safeguarding Against the Unexpected: Crucial disability and critical illness riders were added to safeguard against the loss of revenue for two years if a key partner was diagnosed with cancer or unable to work.

The Result: A Multipurpose Financial Tool

The life insurance audit transformed ABC Development’s policy from a loan-driven necessity into a powerful tool, unlocking several benefits:

  • Security for Lenders & Investors
  • Maximized tax advantages within their growing business
  • Potential retirement strategy supplement
  • Enhanced long-term business continuity planning

Common Questions About Life Insurance Audits

  • Q: I already have life insurance. Why do I need a policy audit?
    • A: Businesses change over time, as do tax regulations and the insurance market itself. An audit ensures your current coverage remains effective and that you aren’t missing out on potential benefits.
  • Q: Can’t I just set up life insurance and forget about it?
    • A: Proactive policy reviews are vital to ensure your coverage keeps pace with your business. Regular audits can protect against underinsurance, missed tax benefits, and outdated policy structures.
  • Q: Can I cancel my coverage now that the business is successful?
    • A: While that’s an option, it’s important to understand the potential consequences. If the policy has accumulated cash value, there may be tax implications. There could also be unintended consequences for your business continuity plan or your personal estate planning. An audit helps you make informed decisions based on your specific circumstances.
  • Q: Can I increase the coverage I already have?
    • A: Absolutely! In fact, audits often uncover the need for increased coverage as businesses grow. Your policy might allow for additional coverage without a full medical exam, or there may be options to convert your existing policy into one with higher coverage. An advisor can help you navigate these strategies.
  • Q: What if my health has changed?
    • A: Changes in health can impact your ability to obtain new life insurance policies. However, your existing coverage won’t be affected. An audit can highlight options like converting a term policy into permanent coverage (if applicable) or maximizing the benefits of your current plan.

Ready to Protect Your Business?

Could your business life insurance be doing more? Discover the potential for enhanced protection, tax savings, and long-term growth with actuarial-backed audits. We collaborate with your wealth advisor, financial planner, and accountant to provide holistic solutions. Contact us to get started.

Tags: corporate insurance, corporate ownership, life insurance, small business owners