Sounds interesting, doesn’t it? Who wouldn’t want to use corporate funds to pay off their mortgage in 15 years? As an incorporated doctor in Canada, this option is available to you with proper planning and the use of an insurance policy. Specifically, a Split Dollar Critical Illness (SDCI) policy.
What is SDCI?
This is an insurance policy owned by the MPC and the doctor is the insured. Since it is a critical illness (CI) policy, it covers the MPC in the event you have a critical illness, think stroke, heart attack, cancer, etc.
A SDCI policy is a CI policy that adds a return of premium (ROP) rider. This rider is owned and paid for by the doctor personally. The rest of the policy is owned and paid for by the MPC. The reason this strategy is called SDCI is that you actually split the ownership and payment of the policy at the beginning of the coverage period, hence you split the dollars.
Details on the strategy
- Corporation owns Critical illness insurance policy.
- Corporation owns return of premium at death rider.
- Individual owns return of premium at end of term benefit rider.
- Corporation pays critical illness insurance premiums.
- Individual pays return of premium.
- Corporation pays $35,000 for 15 years. At the end of year 15, the individual cancels the policy and exercises their return of premium right.
- Individual receives a cheque for $525,000 ($35,000 x 15) at year 15 tax-free.
- If the individual becomes disabled during the 15 year payment period, then premiums are paused until disability has been resolved.
- If the individual becomes critically ill during the 15 year coverage period, the corporation receives a large cheque from the insurance company, tax-free. Although this is not the goal of the strategy, it is a benefit.
- If the individual does not become critically ill during the coverage period, they use the ROP rider and receive a cheque to them personally for $525,000 (in this example) tax-free.
Why is this a good strategy?
- To end up with $525,000 after tax personally you’d need around $1,050,000 cash in your corporation. Half would go to tax, and half would go to you.
- If you invested $35,000 corporately each year for 15 years you’d need to earn an annual compounding rate of return of 9.3% to grow the account to $1,050,000
- The strategy is equivalent to a 9.3% rate of return. This return is through tax savings, so there’s no market risk.
How do I know this strategy is right for me?
If you are a doctor in Canada and enjoy tax savings and guaranteed returns on your money, this strategy fits your profile. You will need to have enough corporate savings annually to fund the policy. The example above of $35,000 annually would be for someone that has investible funds in their MPC of $60,000+ annually and has a sizable liquid portfolio in place.
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