Executive Health Plans (EHPs) are insurance solutions designed for incorporated businesses. EHPs provide critical illness protection for the key person of the company, typically the business owner. The cost of the plan is split between the company and the key person. The company receives a lump sum benefit if the key person is diagnosed with a covered critical illness. If no claim is made and the key person remains healthy, 100% of the premiums are paid back to the key person.
What You Need to Know
There are three key components to an Executive Health Plan:
- Critical Illness Benefit
This is the non-taxable amount that will be paid to the company in the event the key person is diagnosed with a covered critical illness.
- Death Benefit
This is the amount that will be paid to the company if the key person passes away. Typically, this is 100% of the premiums paid.
- Health Benefit
This is the non-taxable benefit that is paid back to the key person if the key person remains healthy and does not claim on the policy. This amount is equal to 100% of the premiums paid.
The first step in implementing an EHP is for the corporation and the key person to jointly purchase a critical illness policy. The company pays the portion of the premiums for the critical illness and death benefit. The key person pays for the portion of the premiums that cover the health benefit. The second step is to seek the services of a lawyer. The lawyer will draft a shared ownership insurance agreement between the key person and the corporation. This agreement will set out the rights and obligations of both parties and will indicate the portion of the premiums both will be required to pay. Finally, the non-taxable benefit will be paid when one of the following events occurs: the insured becomes critically ill, the insured dies, or the insurance coverage expires.
Example
Ben is 30 years old and the primary shareholder/owner of Ben Corp. Ben is worried about protecting the company in the event he becomes severely ill. He and his advisor determined an Executive Health Plan would solve this problem and set up a 15-year term with a critical illness benefit of $500,000. The premium for the critical illness benefit and the death benefit is $5,000. This will be paid for by the company. The premium for the health benefit is $2,000. This will be paid for by Ben. The policy will pay out in one of three ways:
- Ben becomes critically ill, and the company is paid a lump sum of $500,000.
- Ben passes away, and the company receives 100% of the premiums paid.
- Ben remains healthy and the 15-year term ends, and Ben receives 100% of the premiums that both he and the company paid.
The Bottom Line
The sudden loss of a business owner, whether temporary or permanent, can have devastating effects on a business. Executive Health Plans can help protect the finances of a business. The EHP has tax and legal consequences that should be discussed with lawyers and tax professionals before it is implemented. Care must be taken in the tax department if the insured is not the business owner, as the taxable consequences of the health benefit could fall on the key person insured.
If you would like a personal consultation, please contact Winnie at winnie@leoganda.com to set up an appointment with Kari to help you remain objective and focused on your future goals, while planning for a healthy financial future.
