We usually think of life insurance as a product used to address specific individual or corporation financial planning needs, with one policy and one owner entitled to rights and benefits.

But what if a single policy could address the needs of two or more parties, and do it in a way that was both tax and cost-effective? That’s what sharing an interest in a life insurance policy is all about. It’s a concept that’s growing in popularity, and can be a beneficial arrangement in a number of situations.

Universal life flexibility is key

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Sharing Interest in a Life Insurance Policy

The transparency and flexibility of universal life insurance has made the sharing of a life insurance interest more practical than it has been in the past. There are countless ways to structure a shared arrangement, but they typically fall into two broad categories:

  • Joint ownership arrangements (such as split-dollar and shared-ownership) where two or more parties own the policy and split the rights and benefits
  • Single ownership arrangements (such as cost-and-benefit sharing) where there is a single policy owner, but two or more parties sharing the rights and benefits.

There are a number of situations in which sharing interests in a single policy can be beneficial, particularly when one of the goals of the insurance arrangement is creating compensation incentives for key employees or executives.

For example, many employers use key employee insurance to protect the business against the loss of important employees in the event of death or disability. At the same time, the employer may also want to provide a compensation incentive to the key employee as a retention tool.

Under a shared insurance arrangement, the employer could receive the face amount death benefit if the employee died, while the employee could own the entitlement to the cash value of the policy. By sharing benefits within a single policy, the business gets the protection it needs in the event of a key person’s death, while providing an ongoing tool to retain a significant employee.

Implement arrangements with care

There are several other situations in which a shared arrangement can be beneficial, from funding a buy-sell agreement to inter-generation financial planning. But no matter what the situation, these arrangements must be structured with care to ensure that there are no adverse or unintended tax consequences.

The key tax issue is the need to accurately value the benefits derived from the policy and allocate premium costs among those sharing the benefits. The legal agreement that divides an interest in a life insurance policy must be carefully structured, and should be reviewed by a client’s tax advisor.

If Canada Customs and Revenue Agency disagrees with the split between benefits it could result in a substantial unplanned tax liability for one or both parties in the future, thereby nullifying any benefit the strategy may have provided.

Canada Customs and Revenue Agency will only provide written confirmation of tax implications in an advanced tax-ruling request. If the amount of money and the tax assessment risk is large enough, it may be worth seeking an advance tax ruling.

For business continuation planning resources for you and your clients, visit www.sunlife.ca/advisor.

Originally published on Advisor.ca