Fair Market Valuation of Life Insurance Policies

As a business owner, you are aware that when you transfer ownership of a personal asset to your company, your company must reimburse you for the fair market value of that asset. That money would be a tax free payment to you as a shareholder. Did you know that a similar process applies when you transfer your permanent personal life insurance policy to your company?

Here are the mechanics of the transaction. An actuary mathematically calculates the fair market value (FMV) of your permanent personal life insurance policy. The fair market value may be higher than the cash surrender value set by an insurance company when it ‘buys back’ a policy, because assumptions made when the policy was issued – for example, the policy holder’s health or prevailing interest rates – may have changed. Once fair market value is determined, the policy can be sold to the corporation owned by the shareholder, creating a shareholder loan. Upon the death of the shareholder, the money can then be paid from the corporation to the surviving shareholders tax free through a nominal account called the Capital Dividend account.

An application of this approach

Let’s say that Mr. and Mrs. Shareholder own XYZ Company, a successful business in Saskatchewan.

In 1993, Mrs. Shareholder purchased a $1 million life insurance policy for estate planning purposes to pay taxes and to increase the amount their two children would inherit. The policy at time of issue was owned and paid for personally by Mrs. Shareholder and the premium at time of purchase was $7,500 per year. In this particular example, the policy issued was a non-participating level premium term to age 100 contract.

In 2008, Mr. Shareholder suddenly passed away, leaving Mrs. Shareholder 100% owner of XYZ Company. In 2009, Mrs. Shareholder began to experience health problems and she needed cash to pay for increased medical expenses. She also wanted to help out her children financially while she could see for herself the difference her gifts made.

XYZ Company was a successful business with substantial cash assets. Mrs. Shareholder didn’t like the idea of using corporate money for personal use because of the tax liability incurred in accessing this cash. Her financial advisor suggested that she have an actuarial firm complete a fair market valuation of her personally owned life insurance policy. They would then determine whether an effective solution might be to sell this asset to XYZ Company, thus creating a shareholder loan value that Mrs. Shareholder could access on a tax free basis.

Mrs. Shareholder had purchased the life insurance when she was 46 years old. At the time of the valuation Mrs. Shareholder was 62 years old and her declining health made her uninsurable. The actuary calculated the fair market value of this policy at $446,000. The policy was subsequently sold to XYZ Company by changing the ownership, beneficiary, and premium payor status of the contract to her company. This created a value of $446,000 that Mrs. Shareholder could access from her company free of any personal taxation.

When Mrs. Shareholder passed away in 2013, she left her two children the shares of XYZ Company. The life insurance policy was paid to XYZ Company as the beneficiary of the contract. Ownership of XYZ Company passed to Mrs. Shareholder’s children. They were able to declare a capital dividend from XYZ Company as a tax free disbursement of cash for the mortality gain from the life insurance policy: a $1 million tax free payout of life insurance proceeds.

This complex strategy requires professional advice

Caution must be exercised in completing such a complex strategy. Multiple factors must be considered: therefore, it is prudent – and indeed strongly advised – that you seek professional advice from your legal, accounting, and financial advisors. It is also imperative that an accredited actuary perform a formal valuation of the contract. In addition, proper legal documents must be prepared and filed. In the example used in this article, a non-participating policy was valued; there could be serious personal tax consequences if a transfer of ownership of a participating policy were considered.  The life insurance company that originally issued the policy would be able to provide a tax calculation on the deemed disposition through transfer of ownership that could negatively impact any tax advantage of this strategy.

Properly applied in the right situation, this strategy can yield substantial benefits.


This article by Dale Berg was previously published in Sask Business magazine. Dale Berg is a Senior Financial Advisor with Assante Financial Management Ltd. providing wealth management services to principals of family-owned and privately held companies. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  Assante Financial Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.