When Should You Consider Owning Whole Life Insurance In Your Corporation?

As a business owner, there are a lot of different options when considering how to use the cash you work so hard to earn. As a VR client, you know that these discussions often include investing in your corporation or withdrawing funds to top up registered accounts, repaying debt vs investing and many other situation specific topics.

One particular item we are seeing clients ask us more and more about is whether purchasing a corporate owned whole life policy is something that should be considered as part of your broader wealth and tax planning strategy.

What is a whole life policy?

A whole life policy is a commitment since it provides coverage for your entire life. This type of policy also includes an investment component and generally fixed premiums throughout your entire life.

Why would you consider acquiring a whole life policy vs a term insurance policy?

Life insurance is something that business owners and high net worth people need to consider as part of their total wealth planning. But given that term life insurance is generally cheaper (especially when purchased younger) and can provide various levels of coverage to suit your needs, why would you opt for the more expensive whole life policy?

There is no one size fits all answer. For some clients, term life insurance will be sufficient for their needs. For other clients, a whole life policy can be an attractive option.

Some common situations where you may consider a whole life policy vs only term insurance would be as follows:

• You are younger and can qualify for whole life insurance at a reasonable premium which will remain fixed over the rest of the policy term, allowing a level of insurance to be obtained at a reasonable cost vs the growing premiums on a term policy in later years or on reapplication.

• You have sufficient excess cash flow available to fund the policy.

• You do not anticipate needing the cash in the policy during your lifetime and are instead looking to leave a “legacy” for your beneficiaries. Since a corporate owned whole life policy will flow into your Capital Dividend Account, these funds can move into your Estate, tax free.

To ensure whole life makes sense in your situation, it is worth asking a few questions to ensure this option makes sense for you:

1. Do you have corporate cash available to fund the policy premium?

Many business owners do not, due to their need to use cash for personal living expenses, taxes, retirement savings and debt servicing. If you cannot comfortably afford the premium quoted, then no further analysis is needed. Regardless of the upsides, if the cash flow is not available, this is not the right option.

2. Which has the greater benefit? Whole life premiums or investments and a term policy?

While whole life insurance policies have an investment component, in the early policy years much of the premiums are not directed to the investment portion. Instead, the premiums are being used to fund the insurance costs and commission on the sale of the policy. It may take many years before a large portion of the premiums begin to flow to the investment portion of the policy.

It is worth asking the insurance representative who is proposing the policy to run an illustration for you to reflect this. What would my position be in X years if I didn’t fund these premiums and instead invested the funds? You should be comfortable that the underlying assumptions used (tax rates, investment returns etc.) are reasonable.

We are always happy to review these with you to ensure that the assumptions being used are reasonable!

3. Do you foresee needing the funds within the life insurance policy during your lifetime?

Even if you have sufficient cash flow available to fund the policy, and even if you will have a better long-term return, will you have enough saved outside of the policy to fund your retirement if you commit to large premiums on the policy? Or will you need that cash invested and available to fund your retirement?

Life insurance policies are inherently illiquid investments. The policy can be borrowed against, but you must consider the high rate at which this borrowing occurs. Will it reduce the amount of capital you have available if your rate of borrowing exceeds the rate of growth in the policy?

If you have significant other capital saved for retirement, then this may be workable to commit to. But you would also need to consider two other factors.

4. Are you comfortable with the additional compliance costs that will be incurred from investing in a corporate owned whole life policy.

First, as long as your policy remains in the corporation you will need to continue filing corporate tax returns. There are annual compliance costs and overall estate complexity that need to be factored into your decision. Are you prepared to maintain the corporation until death? Otherwise, you would need to take the policy out of the corporation via a dividend-in-kind, which would trigger personal tax on an illiquid investment being received.

Second, if the company holding the policy is a company you are aiming to sell to fund your retirement, it may impact your ability to qualify for the Lifetime Capital Gains Exemption as it is a “passive” rather than “active” asset in one of the key tests to allow access to the exemption.

If you were to aim to move the policy to purify the corporation, Section 85(1) cannot be used on a life insurance asset. Meaning you will likely trigger a taxable policy gain if transferred to another corporation.

5. Is your main goal of acquiring this whole life policy to provide the largest after-tax amount available to your Estate?

As above, this is not a given and needs to be compared to the other options available to you. While whole life insurance will pay out tax free to your Estate via the Capital Dividend Account, if it has not grown to same level as investing the funds in a non-registered account, you will not be ahead. Even if there is tax on the deemed disposition at death of the non-registered investments you may still have more net cash after tax from investing outside of an insurance policy if the growth rate in the non-registered account is greater by a significant degree.

If your investment advisor is comfortably able to generate a return of 7.5% net of tax in your corporate investment account vs 3% in the policy, you would want to estimate what your investment balance will grow to in each option over the same period, before committing to the whole life policy.

6. Are you only considering a whole life insurance policy due to concerns around the “grind” of your Small Business Deduction as a result of your corporation earning Aggregate Adjusted Investment Income (“AAII”) from non-registered investments?

As a refresher, for those of you who remember back to 2018, corporations earning AAII in excess of $50,000 begin to have a reduction of their Small Business Deduction. For every dollar above $50,000, $5 of SBD is reduced with the full SBD reduction occurring at $150,000 of AAII.

Investment income within a whole life policy is NOT included in the AAII calculation, and since 2018 this has been an often-cited reason for small business owners to consider acquiring whole life policies.

This reduction should not be a make-or-break reason to invest in a whole life policy. For most business owners, the level of capital that will need to be invested in order to earn sufficient AAII to grind their SBD will take many years to accumulate. This will likely take a large portion of the earning years and limit the impact of grind to a small number of years where they both have significant savings in the corporation and active income.

Even to the extent the grind occurs, and your corporation is taxed at the higher rate, it gains the ability to pay out eligible dividends, which are taxed at a lower rate personally. If you are primarily compensating yourself with dividends, you need to look at this wholistically and compare the increased corporate tax with the decreased personal tax to determine if the benefit of the whole life policy is sufficient in this context.

As you can see, the decision to invest in a whole life policy in your corporation is not a simple analysis. There are many factors at play, and you will want to be sure that you are satisfied that the considerations we have highlighted have been fully considered before committing to premiums on a large policy. This is a long-term decision where ownership and dollars matter greatly.

The VR team is always happy to help you with the tax side of this analysis!

The above material is current as of July 15, 2026.

The information presented is a general overview and not intended to cover specific situations. You should consult with your professional advisors directly before taking any action.

Vertefeuille Rempel Chartered Professional Accountants LLP, its partners, employees and agents do not accept or assume any liability by anyone relying on the information presented.