Building your own business is an exciting journey. You funnel your energy, time and resources into making your business successful, but what happens if you or your business partner passes away? Preparing for the ‘what ifs’—from unexpected loss to succession—is key to protecting your business. Life insurance can help maintain cash flow, cover liabilities, and support long-term planning. But what kind of coverage is right for your business? Let’s explore two main types of life insurance—term and permanent—and how each can support different business needs.

How do term and permanent insurance work?

Canada Life’s term life insurance covers set periods between five and 50 years. It can cover important obligations such as mortgages and business loans, and replaces income should you or your business partner pass away during working years.  

On the other hand, permanent life insurance offers lifelong protection and a guaranteed payout on death. A unique benefit of a permanent policy is that it can also include a growing cash value component— which varies by policy type and conditions—that the policyowner can access via a loan or withdrawal. That cash value grows tax-free while inside the policy and can be used for retirement, business expansion, or emergencies. 

Term vs. permanent insurance: How to choose

The choice between term and permanent insurance comes down to various individual factors. Questions to talk through with a financial or insurance professional before landing on a policy include:

•  “What are my financial goals?”
•  “What’s my budget?”
•  “How many years will I need coverage?” 
• “What will happen to my business when I retire or pass away?” 
• “How do I transfer wealth between generations most effectively?” 

Sometimes, business owners use multiple types of insurance to meet their evolving needs, starting with term insurance and converting to permanent insurance as the business grows. 

“Consider your current financial capacity and long-term goals. If the priority is maximizing the payout at death now with a limited budget, start with term. If you’re thinking about long-term wealth building, tax efficiency, and estate planning, a permanent policy—even a modest one—can be a powerful asset, especially when owned corporately,” says David Stewart, senior vice president, Insurance Solutions Distribution at Canada Life.

Transitioning from term to permanent insurance 

Let’s look at the example of Steve, the owner of a small exterior painting company. 

Seventeen years ago, Steve purchased a corporately owned 20-year term policy when he got a business loan. By structuring the policy under the company’s name, he was able to take advantage of the lower corporate tax rate, with the corporation as the policy owner. In the event of his death, his policy provides an immediate payout on death to cover liabilities like capital gains taxes, and it helps protect the value of his business by ensuring continuity.

With the policy approaching renewal, Steve meets with his advisor to explore his options. He’s worried that a newly diagnosed medical condition could complicate underwriting for a new policy.

After meeting with his advisor and reviewing his options, Steve decides to convert his term insurance into permanent life insurance. This allows him to bypass medical underwriting and secure lifelong coverage, provided premiums continue to be paid. With the company as the policy owner, the company stands to benefit from tax-free growth within the policy. Upon his passing, the corporation may be able to distribute a significant portion of the payout at death to shareholders as tax-free dividends through a capital dividend account.

Find the best insurance policy to protect your legacy 

Choosing between term and permanent life insurance isn’t a one-size-fits-all, set-it-and-forget-it decision—it depends on your business goals, financial situation, and long-term plans. 

Many business owners consider term insurance for its cost-effective protection while the company grows, while permanent insurance offers lifetime coverage, tax advantages, and estate planning benefits. Some business owners opt for both term and permanent insurance coverage. Financial planning can be complicated, so it’s important you get the right advice. An advisor can help. 

Visit canadalife.com to learn more.