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The top ten reasons why a business owner should never consider life insurance.
A satirical note. With sincere thanks to Dr. Tom Deans for inspiring the list.
This piece was inspired by the work of Thomas William Deans, Ph.D., a renowned speaker and the author of Willing Wisdom, Every Family’s Business as well as The Happy Inheritor. As a thought leader and long-standing friend of Leyland & Matters, we have shared Tom’s books with our clients as well as our network, and we have had the privilege of hosting him as a speaker on several occasions. His “Top Ten Reasons Why You Should Never Write a Will” is the sharpest piece of estate planning writing we have come across. He reminded us that the most effective way to make a case is sometimes to argue the opposite. So, in the spirit of Tom’s style and with his example in mind, here are our ten reasons why a business owner should never consider life insurance.
The CRA is your most deserving beneficiary.
You have spent decades building a business. On the day you die, a significant portion of that value will be deemed to have been sold. The resulting tax bill arrives within a matter of months and belongs to your estate. The CRA does not accept "we need more time to sort this out." But look on the bright side. Supporting federal revenue is a noble cause. Why on earth would you want to pre-fund that liability with something as unsentimental as life insurance?
Your buy-sell agreement is working fine as a piece of paper.
You and your business partner drafted a shareholders’ agreement. It describes what happens when one of you dies. It is a beautifully worded document. The fact that there is no funded mechanism to actually execute it is a minor detail. When you die, your partner will simply write your spouse a cheque for their share of the business, out of their personal savings, on a grief timeline. This is exactly how business transitions should work.
Your surviving spouse has always wanted to learn the business.
Your partner has supported this business from the outside for decades. Upon your death, they will inherit your shareholding, your obligations, your corporate structure, and every decision that comes with all of it. This is a wonderful time to start. Grief is clarifying. Corporate governance under pressure builds character.
The estate freeze was perfect the day you signed it.
When you did the freeze, the company was valued at a number that made sense and the plan was to redeem the shares prior to their value reaching the estate, with the growth value being attributed to the next generation. The company is now worth considerably more and you’re not sure that you want the next generation to take ownership of the growth shares on the originally planned timeline. The tax exposure on that growth will likely end up back in your estate with no liquidity to fund it.
Equal is fair, and you have three children.
One of your children works in the business. Two do not. Your will divides your estate equally among all three. The child in the business will need to buy out the other two. With what, exactly, has not yet been settled. Equality, however, is a virtue. The family will work it out at the kitchen table, at the worst possible time, with the highest possible stakes, and the fewest possible liquidity options. This will bring them closer together.
The holdco will sort itself out.
Decades of retained earnings sit inside the corporation. The passive income is taxed. The extraction is taxed. On death, what remains is taxed again. There is a version of this where the structure unwinds and the family receives what you intended. That version requires some planning. But the holdco has been working perfectly well without it so far.
Key-person risk is a concern for other businesses.
Your company depends on you. The relationships, the institutional knowledge, the revenue pipeline. If you disappeared tomorrow, the business would need time, and probably capital, to stabilise. Lenders might call their loans. Clients might pause their commitments. Staff might reassess their options. But this scenario is unlikely. And preparing for unlikely scenarios is what worriers do.
Your advisors are definitely talking to each other.
You have a CPA. You have an estate lawyer. You have a wealth manager. Each knows their piece of the picture with precision. What none of them is formally responsible for is the insurance architecture that makes all of their work executable when it matters most. Surely someone is watching that gap. Either way, you can be reasonably confident it is covered.
The business sale will take care of everything.
When the time comes, you will sell. The proceeds will fund the estate, the equalization, the taxes, and the family’s future. This is a sound assumption, provided the business sells on your timeline, at your expected value, without a distressed discount, to a buyer who exists and is ready. These conditions are nearly always met. Or close enough.
Life insurance is for people who have not done the planning.
You have done the planning. Years of it. The will is current. The freeze is in place. The advisors are engaged. Your instinct is that the insurance piece is either handled or not necessary. That instinct has served you well in business. It will serve you equally well here. The fact that almost no one on your advisory team is formally responsible for asking whether the insurance architecture behind your estate plan actually works is beside the point. The plan is good. Someone would have said something by now.
Doug Leyland, CPA, CA, MBA and Jordan Matters, CPA, CA, CIM are the principals of Leyland & Matters. Their work is about enhancing family estate harmony. They make estate plans executable.
