Many dentists purchase life insurance early in their careers and hold the policy personally. But once you incorporate your dental practice, it may be worth reviewing whether personal ownership still makes sense.
Corporate-owned life insurance allows a dental professional corporation to own and pay for a life insurance policy and receive the death benefit. Depending on your corporate structure, retained earnings, insurance needs, and long-term goals, this strategy can provide both protection and tax-planning opportunities.
It is not the right strategy for every dentist. Understanding how it works can help you determine whether corporate ownership fits into your overall financial plan.
What is Corporate-Owned Life Insurance?
Corporate-owned life insurance (COLI) is a life insurance policy owned by a corporation. The corporation generally owns the policy, pays the premiums, and is the beneficiary, while the dentist or another individual is the insured.
The strategy can use different types of life insurance, including term and permanent coverage. Permanent policies, such as whole life or universal life insurance, may be considered when there is a long-term need for coverage and the policy’s cash value is part of the planning strategy.
For dentists, corporate-owned life insurance can be used for more than family protection. It may also help with practice succession, shareholder agreements, estate liquidity, and long-term tax planning.
Why Consider Corporate Ownership?
One of the main reasons dentists consider corporate ownership is the source of the funds used to pay the premiums.
When insurance is purchased personally, premiums are paid from after-tax personal income. When a professional corporation owns the policy, premiums are generally paid with corporate funds that have already been taxed at the corporate level.
Life insurance premiums are generally not deductible as a business expense. There is a limited exception when a qualifying life insurance policy is assigned as collateral for certain business borrowing.
The potential advantage, therefore, is not a corporate tax deduction. Instead, it is the ability to fund the policy from corporate earnings that may otherwise need to be withdrawn personally before they can be used to pay the premium.
For an incorporated dentist who regularly retains earnings in the corporation, that difference can be worth considering.
Key Tax Advantages for Dental Corporations
Tax-Deferred Growth Within a Permanent Policy
Permanent life insurance policies can build cash value over time. Unlike a traditional corporate investment account, the cash value of an exempt life insurance policy is not generally treated as passive investment income while it remains within the policy.
This can make permanent insurance an option to consider when a dentist has corporate surplus and a long-term insurance or estate-planning need.
However, a policy should not be viewed as a replacement for a corporate investment portfolio. Policy costs, cash surrender values, guarantees, and access to the cash value vary by policy. The decision should consider the dentist’s overall financial plan, not just the tax treatment.
Access to the Capital Dividend Account
The capital dividend account (CDA) is another important part of corporate-owned life insurance planning.
When a corporation receives life insurance proceeds following the death of an insured person, a portion of those proceeds can generally be added to the corporation’s CDA. The amount available is generally based on the policy proceeds received by the corporation, less the policy’s adjusted cost basis (ACB).
If the corporation has sufficient CDA room, it can elect to pay a capital dividend to its shareholders. A properly elected capital dividend can generally be received tax-free by Canadian-resident shareholders, subject to the applicable rules.
For example, if a corporation receives a $2 million life insurance benefit and the policy’s ACB is $250,000 at the time of death, the amount potentially added to the CDA would be $1.75 million, before considering other CDA adjustments.
This can provide corporate liquidity while creating an opportunity to distribute a portion of the insurance proceeds to shareholders through a capital dividend.
How Dentists Can Use Corporate-Owned Life Insurance
Corporate-owned life insurance can serve several purposes depending on the dentist’s circumstances.
Funding a Buy-Sell Agreement
If a dental practice has multiple shareholders, a shareholder agreement should address what happens if one owner dies.
Life insurance can fund a buy-sell arrangement, helping the surviving owners purchase the deceased shareholder’s interest without having to draw on practice cash flow or arrange financing at a difficult time.
This can also provide the deceased shareholder’s family a source of liquidity while helping the practice continue operating.
Providing Liquidity for Estate Planning
A dental practice can represent a significant portion of a dentist’s net worth. Other assets, including registered investments, real estate, and corporate investments, may also create tax liabilities at death.
Life insurance can provide liquidity to help address these obligations. This may reduce the need for the estate or corporation to sell assets quickly to raise cash.
The appropriate amount of coverage depends on the dentist’s personal and business circumstances and should be determined as part of the broader estate plan.
Supporting Post-Mortem Planning
Corporate-owned life insurance can also be considered alongside post-mortem tax planning strategies.
The availability of insurance proceeds and CDA room may provide additional flexibility when planning how corporate assets and shares will be handled after death.
Because post-mortem planning can involve complex tax rules, the insurance strategy should be coordinated with the dentist’s accountant, tax advisor, and other professional advisors.
Protecting the Practice from the Loss of a Key Person
Some dental practices depend heavily on the production of one or more dentists.
If a key dentist dies unexpectedly, the practice may need time to recruit a replacement, manage patient relationships, and adjust its operations.
Appropriately structured insurance coverage can provide financial support during that transition and help protect the value of the practice.
Is Corporate-Owned Life Insurance Right for Your Dental Practice?
Corporate-owned life insurance can be a valuable planning strategy for some incorporated dentists, particularly those with retained corporate earnings, permanent insurance needs, estate-planning concerns, or shareholder succession requirements.
But it is not a one-size-fits-all solution. The value of the strategy depends on the policy, your corporate structure, cash flow, insurance needs, and long-term plans.
At Dental Tax, we work specifically with dentists and understand how personal, corporate, insurance, and tax planning can overlap. Our tax planning and insurance services can help you evaluate how a corporate-owned life insurance policy fits into your broader financial plan.
If you are considering corporate-owned life insurance for your dental practice, speak with a dental-focused tax professional before purchasing a policy.
