Corporate-Owned Life Insurance: How It Works and When It Makes Sense

Premiums paid from the corporation come from dollars taxed at the corporate rate — in Alberta, generally the small business rate on active business income up to the federal limit. Premiums paid personally come from dollars already taxed at your marginal personal rate, which is materially higher for most incorporated owners. That gap is the starting logic for corporate ownership: routing insurance costs through lower-taxed corporate dollars, rather than higher-taxed personal income.

This isn't automatic savings — it depends on what the policy is actually funding and what happens to the proceeds. A term policy funding a personal mortgage is a different calculation than a permanent policy funding long-term corporate wealth transfer. Your accountant can model the after-tax comparison for your specific corporate and personal tax situation.

Most corporate-owned life insurance for planning purposes is permanent — whole life or universal life — rather than term. Two reasons. First, the planning problems it solves (retained earnings, estate tax liquidity, buy-sell funding) are permanent problems: the corporation will eventually face them regardless of when death occurs, so the coverage needs to be in force for life, not for a fixed term. Second, permanent policies build cash value — a tax-sheltered investment component inside the policy that grows without annual taxation, unlike a GIC or bond held directly on the corporate balance sheet.

That cash value is what makes strategies like the Corporate Insured Retirement Plan and Corporate Estate Bond work: retained earnings that would otherwise sit in a taxed investment account instead fund a policy whose growth isn't taxed annually, and whose eventual death benefit passes to shareholders substantially tax-free through the Capital Dividend Account.

The adjusted cost basis (ACB) is a tax figure that starts near the premiums paid and generally declines over the life of a permanent policy. When the corporation receives a death benefit, the amount by which that death benefit exceeds the policy's ACB immediately before death is credited to the corporation's Capital Dividend Account (CDA) — a notional account tracking amounts the corporation can pay to shareholders as a tax-free capital dividend.

Without this mechanism, moving a comparable amount from a corporation to a shareholder personally typically triggers dividend tax — often 40–48% in Alberta depending on dividend type and the shareholder's marginal rate. The CDA credit is why corporate-owned life insurance is central to corporate wealth transfer and estate planning for incorporated owners.

Four structures come up most often once a corporation has meaningful retained earnings:

Corporate-owned life insurance touches several things your own accountant needs to confirm for your specific structure — this is not a substitute for that conversation:

• How premiums affect your corporation's passive income and small business deduction eligibility.
• The exact ACB and CDA credit calculation for your specific policy and premium history.
• Whether Opco or Holdco should own the policy, if you have that structure — see Life Insurance for Holding Companies.
• How the policy interacts with an existing or planned shareholder agreement.