Most Canadian business owners carry personal life insurance to protect their families — but few have comprehensively addressed the insurance needs of their business itself. The loss of a key person, an unexpected disability, or the death of a business partner can threaten everything you've built. Here's what every business owner should consider.
Key person insurance
A key person is anyone whose loss would significantly disrupt the business — typically the owner, but also key employees, rainmakers, or technical experts. Key person insurance is owned by the business and pays a lump sum to the company if the key person dies or becomes disabled.
The payout can be used to:
- Cover revenue losses while recruiting and training a replacement
- Repay business loans or lines of credit that depended on the key person's personal guarantee
- Fund the cost of a search for and compensation package for a highly skilled replacement
- Reassure clients, suppliers, and lenders that the business will continue to operate
Coverage amount: typically 3–10 times the key person's annual contribution to revenue or profit.
Buy-sell agreement funding
If your business has multiple owners or shareholders, a buy-sell agreement determines what happens to an owner's share if they die, become disabled, or exit the business. Without a funded buy-sell agreement, surviving partners may be forced into partnership with a deceased owner's estate — which may have very different interests.
Partner A and B each own a policy on the other. When Partner A dies, Partner B uses the proceeds to buy Partner A's shares from their estate. Works well for 2 partners.
The corporation owns policies on all shareholders. On death, the company uses the proceeds to buy back the deceased's shares. Works well for multiple partners.
The insurance policy funds the buy-sell agreement — ensuring there's actually money available to execute the buyout when needed, rather than forcing a fire sale or bringing in unwanted new partners.
Corporate-owned life insurance (COLI)
For incorporated business owners, corporate-owned life insurance is one of the most tax-efficient wealth-building and estate planning strategies available. The corporation buys and owns a permanent life insurance policy on the owner. Key advantages:
- Premiums are paid with after-corporate-tax dollars — often more efficient than paying personally
- The policy's cash value grows tax-sheltered inside the corporation
- On death, the death benefit is paid tax-free to the corporation
- The proceeds flow to shareholders through the Capital Dividend Account (CDA) — tax-free to heirs
- This effectively converts retained corporate earnings into a tax-efficient legacy for the next generation
Critical illness for business owners
Business owners are especially vulnerable to the financial impact of a critical illness because their income stops when they stop working. A critical illness policy owned by the corporation provides a lump sum that can:
- Fund the cost of temporary management replacement or contractors
- Cover the owner's personal income needs during recovery without drawing down corporate reserves
- Give the owner the financial freedom to take as long as needed to fully recover
- Be structured with a return of premium provision — if no claim is made, premiums are refunded
Business insurance checklist
Key person coverage
Does your business have insurance on yourself and any other people whose absence would significantly impact revenue or operations?
Funded buy-sell agreement
If you have business partners, is there a legally documented buy-sell agreement with adequate insurance to fund it?
Corporate life insurance
Have you explored whether corporate-owned permanent insurance makes sense for tax-efficient wealth building and estate transfer?
Personal disability insurance
Do you have disability coverage that would replace your income if you were unable to work? Most business owners don't.
Critical illness (personal and/or corporate)
Is there a lump sum available if you were diagnosed with a serious illness?
Carrie specializes in business owner insurance planning. With her CLU® designation and deep experience advising incorporated professionals and small business owners, she can build a comprehensive insurance strategy that protects your business, your partners, and your personal wealth — and ensures your life's work is protected.
Carrie Wang
Carrie is the founder of Seven Lakes Financial Services Inc. and a Sun Life advisor serving clients across Ontario and Saskatchewan. She specializes in retirement, estate, and investment planning, with a warm, personalized approach. She is fluent in English, Mandarin, and Taiwanese.