Critical Illness
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Critical illness can give you a tax-free payment if you’re diagnosed with a serious condition. Your contract will define which conditions you’re covered for, but some examples include cancer, heart attack or stroke.
Let’s say you become diagnosed with an illness covered by your policy and you survive the waiting period. In such cases, you’ll receive a lump-sum payment once your claim is approved. You can then use this money however you want and for any reason. For example, this can cover out-of-pocket expenses that may not be covered by your provincial or territorial health insurance, such as certain prescription drugs, mortgage, rent, short- or long-term care, etc.
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Split-Dollar Critical Illness Insurance or Shared Ownership refers to a concept where more than one party owns an interest in an insurance policy. The most common of these arrangements is where the corporation is the owner and beneficiary of the death benefit and the shareholder, and an employee owns the cash value of the policy.
Recently there has been growing interest in applying this strategy to a Critical Illness policy. The concept is referred to as Shared Ownership or Split Dollar Critical Illness. Although the CI policy does not have cash value, there is usually an option to have a Return of premium (ROP) in the following situations:
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Upon death – If the insured dies without having submitted a claim for the critical illness the premiums paid are refunded;
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Upon termination – If the policy reaches its termination age without a claim being made, the premiums paid are refunded (tax free exit from the corporation);
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Upon surrender – If the policy is surrendered without a claim, premiums paid are refunded.
Anyone who owns shares in a corporation and wishes to protect that corporation against loss if one of the shareholders or other key employee is diagnosed with a critical illness.
A Shared Ownership Agreement is drafted documenting:
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That the corporation will own, pay for and be the beneficiary of the CI coverage on the key shareholder or employee;
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That the shareholder will own and pay for the Return of Premium option upon the surrender of the policy.
Under this arrangement, the company is protected against loss but should no critical illness occur the shareholder/employee will receive a financial benefit as the premiums paid will be refunded. Provided this is set up properly, the shareholder or business owner could receive the premium in a tax-preferred way.
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