The smart way for business owners to purchase critical illness.

As a small business owner, balancing personal protection with business financial priorities can be a challenge. Health risks, particularly critical illnesses like cancer, heart disease, or stroke, can disrupt your life and your business. A well-structured Critical Illness Insurance Policy can offer a safety net for both, helping you cover medical expenses, replace lost income, or keep your business afloat while you recover.

One smart way for business owners to minimize the cost of this protection is through a Critical Illness Policy where the company pays the base premium and the owner pays for the Return of Premium (ROP) supplement. This strategy allows business owners to benefit from crucial insurance coverage while also securing the ability to recover premium costs in the future.

In this blog, we’ll explore how this structure works, why it benefits small business owners, and how it can protect both personal and business interests.

What Is a Critical Illness Policy with Corporate-Paid Premiums and Owner-Paid Return of Premium Supplement?

This type of policy allows a business to cover the cost of the base premium for critical illness insurance, while the owner personally pays for a return of premium (ROP) rider. The critical illness insurance provides a lump-sum payout if the policyholder is diagnosed with a covered critical illness, offering financial support for personal or business use.

The Return of Premium (ROP) supplement is an additional feature that refunds all or a portion of the premiums if no claim is made by a certain age or policy maturity date. This essentially allows the business owner to “recover” the costs of insurance if they never need to use the policy.

By splitting the costs in this way—having the company pay for the primary coverage and the owner personally covering the ROP supplement—both business and personal financial objectives are achieved.

Key Benefits of This Structure for Small Business Owners

1. Business Covers the Main Insurance Costs – The most immediate benefit of this structure is that the company pays for the critical illness premium, removing the financial burden from the owner’s personal finances. This is especially useful because a critical illness policy can be an essential business protection tool, especially for owner-dependent operations. If the owner or key person becomes seriously ill, the insurance payout can be used to:
   • Cover operational expenses during recovery,
   • Repay business loans,
   • Pay salaries or hire temporary help.
   • This makes it a cost-effective risk management strategy for the business, ensuring continuity while protecting against the financial fallout from a serious illness.

1. Owner Gains Personal Financial Protection – While the company is covering the core premium, the business owner still benefits personally from the policy. If diagnosed with a covered illness, the lump sum payout can also be used for personal needs such as:
   • Covering out-of-pocket medical costs,
   • Paying off personal debts or mortgages,
   • Supporting their family during recovery.
   • Since the benefit is typically tax-free, this offers significant financial relief when it’s most needed.

1. Tax-Efficient Strategy – In many cases, the portion of the premium paid by the company is not taxable to the business owner, making this an efficient way to obtain critical illness coverage. The business, however, can’t deduct the premium as an expense because the payout benefits the business owner (or key person). Despite this, the strategy remains a tax-efficient way for the owner to secure coverage without directly impacting personal cash flow.
2. Return of Premium (ROP) Option Offers Additional Financial Security – The ROP supplement, which is paid by the business owner personally, adds an extra layer of financial benefit. If no claim is made and the policy matures (usually around the age of 65 or 75, depending on the terms), the owner can receive all or a significant portion of the premiums paid over time. This refund can act as a forced savings mechanism, ensuring that even if the owner doesn’t face a critical illness, the premiums paid aren’t lost.
   Paying for the ROP rider personally allows the owner to benefit from the refund directly, while still leveraging the company’s resources to cover the primary cost of insurance.
3. Preserves Personal Cash Flow While Offering Long-Term Benefits – By having the company pay the base premium, business owners preserve their personal cash flow while still securing crucial financial protection. The ROP supplement is typically much lower than the base premium, making it a manageable expense for the owner, especially given the potential for a significant refund if no claim is made.
   This structure helps small business owners balance their personal and business needs without stretching their financial resources.
4. Protects Both Personal and Business Assets Critical illness coverage is not only valuable for the business but also for the owner’s personal financial security. This structure protects both:
   • Business Protection: The lump-sum payout from the policy can be used to support business operations if the owner is unable to work due to illness, safeguarding the business from financial strain.
   • Personal Protection: In the event of a critical illness, the owner can use the funds for personal expenses, providing peace of mind and ensuring that the financial burden of recovery doesn’t fall entirely on their family.

1. Flexible Payout Usage – One of the greatest benefits of critical illness insurance is that the payout can be used for any purpose. Whether you need to cover medical bills, fund experimental treatments, or simply replace lost income, you have full discretion over how to use the funds. For business owners, the flexibility to apply the payout to either business or personal needs makes this type of policy a versatile tool for managing risk.

An Example Scenario

Let’s look at how this strategy could work for a small business owner, Sarah, who owns a marketing consultancy. Sarah’s company pays the base critical illness insurance premium of $5,000 per year. Sarah, personally, pays an additional $1,000 annually for the ROP supplement.

• If Sarah is diagnosed with a critical illness, she receives a tax-free lump sum of $250,000, which she can use for personal medical expenses or to hire a temporary team to run her business while she recovers.
• If Sarah reaches age 65 without making a claim, the ROP rider allows her to get back the full $5,000 annual premiums her company paid over the years. This provides her with a substantial refund and makes the coverage feel essentially “free” since all premiums have been returned.

Conclusion

A critical illness policy where the company pays the primary premium and the owner covers the return of premium (ROP) supplement offers small business owners a smart, cost-effective way to protect both personal and business finances. By splitting the costs in this way, the owner can benefit from comprehensive critical illness coverage without draining personal cash flow while also securing a potential refund if the coverage goes unused.

This structure provides a balance between business risk management and personal financial planning, offering both short-term protection and long-term financial benefits. For small business owners seeking an efficient, flexible insurance solution, this strategy is well worth considering.

To explore how this type of policy could fit into your business and personal financial plan, contact Ken Rousselle at KMR Financial & Estate Planning Services.