You own a private corporation that has significant assets in taxable investments. You don’t plan to use these investments for any specific purpose during your lifetime. Instead, you want to transfer this wealth to your children or other beneficiaries after your death, but investment earnings are taxable when liquidated and paid out as a taxable dividend.
Your corporation purchases a permanent life insurance policy on you, the key person, to cover a life insurance need. This immediately increases the estate value of the shares. Growth within the policy can accumulate on a tax-exempt basis. Upon your death, the death benefit is paid tax free to the corporation. This payment creates a partial or full credit to your corporation’s capital dividend account which can be paid to your estate as a tax-free capital dividend.
