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How to Use Corporate Financial Statements to Spot Insurance Planning Opportunities

Thanks for the corporate financial statements! Now what?

Spotting the insurance planning opportunities

There will come a time in our discussions with our incorporated business owner clients when asking for the financial statements will become appropriate. It may be initiated by the insurance carrier to confirm and/or justify coverage and premium suitability as part of their financial underwriting criteria. It can also be initiated by the advisor requests as part of their thorough fact-finding process and commitment to due diligence before determining and recommending sound financial planning solutions. Sometimes it’s both.

Regardless of what the spark is, financial statements can provide valuable insight to a trained advisor and uncover potential insurance planning opportunities. In this article, I’ll review the 2 most important financial statements: the balance sheet and the income statement and uncover the planning gems that lie within.

As mentioned above, most carriers require 2 years of financial statements for insurance amounts $10 million or greater. Enclosing financial statements with a properly organized cover letter can go a long way in supporting your arguments as to why the coverage and the premium amounts recommended are suitable for the client. For more information on arranging a cover letter, please read my Nov 2022 article: The Importance of a Cover Letter: Selling the Case to the Underwriter ( Aside from selling the underwriter on the case, collecting financial statements which usually come after “asking the right questions” demonstrates an advisor’s commitment to a needs-based planning approach (or holistic planning). Getting to understand your clients, desires, wants and aspirations are key to forging a strong, and long-lasting professional relationship. See my Aug 2022: Business Insurance Planning: Asking the Right Questions and Spotting the Opportunities (


What are financial statements and WHAT do they tell us?

Financial statements are reports that summarize important financial accounting information about the business. They usually indicate the company’s overall financial health. How they’re performing, whether they are solvent (able to pay their bills), the resources available (machinery, inventory, etc.), financial obligations (debt repayment, dividends), and most importantly their ability to generate future income and cash flow.

The Balance Sheet:

The balance sheet is essentially a snapshot of a company’s financial position at a point in time (fiscal year end). There are generally 3 parts:

(1) The assets, which is what the company owns (i.e. cash, investments, accounts receivables, equipment, machinery, real estate, etc.),…

(2) the liabilities, which is what the company owes or debts outstanding (i.e. accounts payable, operating loans and mortgage, shareholder loans, etc.),…and

(3) the shareholder’s equity, which is the difference between (1) and (2) or the remaining balance is what the shareholder owns. A big part of this component is the “RETAINED EARNINGS”. This is a measure of the assets generated through profitable activity (reported on the income statements in the past) and not paid out as dividends to the shareholder(s).

A healthy Retained Earnings not only signifies that the company has done well but is reinvesting its profits back into the company for future growth. Read below for what it doesn’t tell you!

The Income Statement:

This report shows you how profitable the business was during a particular period (typically one year). It summarizes the revenue it generated minus the expenses it incurred to generate that revenue. The bottom line is the ‘net earnings/profits (loss)’.


What DON’T these statements tell you? (common misconceptions):

The figures on the balance sheet represent current market values. This is incorrect! The figures recorded actually represent the book value or the cost at the time of purchase and NOT today’s market value. Let’s take a building that was purchased in 1990 for $1 Mill. Although today it’s valued at $4 Mill,… it’s the 1990  purchase price that is recorded on the balance sheet.

The shareholder’s equity in the balance sheet represents the current fair market value of the business. This is also incorrect! This partly stems from assets being recorded at book value and not current market value.  In addition, a company’s goodwill, which is often the company’s biggest asset doesn’t even appear on the balance sheet, unless it was purchased. Proper business valuation requires the use of different metrics, which may include a multiple of earnings.

The retained earnings represent “CASH”. This one is probably the most misunderstood by advisors. We generally seem to fall into this trap since most of our tax-efficient insurance planning solutions discuss redirecting otherwise taxable surplus capital (profits not paid out as dividends) which are retained in the company to a permanent life insurance. Although this surplus is captured in the “Retained Earnings” section of the balance sheet it is not necessarily resting in CASH or other liquid assets. Some or all of this money can be reinvested in the company in the form of fixed assets, like, real estate, inventory, and machinery. Leaving little or no funds available to support a permanent life insurance policy. IFA anyone???


Planning opportunities:

Balance sheet holds excessive passive assets:

This can cause significant problems in an OPCO (operating company). One, investments are subject to corporate creditors and two, may also jeopardize a shareholder’s ability to use the capital gains exemption (specifically when passive assets make up more than 10% of the overall value of the corporation).

Possible solutions: may signal the need for a HOLDCO (holding company) and tax planning involving purification and eventually crystallization techniques to claim the capital gains exemption. The benefits of the HOLDCO can range from the ability to pay dividends tax-free from the OPCO to the HOLDCO, assets being protected from creditors of the OPCO, and profits can be invested or lent back to the OPCO if needed. See the article dated Oct 2023 for more information on When to consider a Holdco?


Now for the good stuff: Where to find insurance opportunities?

Reviewing and understanding a client’s financial statements can provide you with valuable insights about a client, and help you identify insurance needs or opportunities, for example:


  • Significant liquidity on the balance sheet in the form of cash or short-term investments (i.e. GICs) may indicate the corporation’s ability to fund a life insurance policy that would facilitate a tax-efficient transfer of wealth. (concepts/strategies: Corporate Estate Bond, Corporate Insured Retirement Plan)

  • Bank loans or mortgages may indicate a need for life insurance to pay off debts.

  • Salaries and wages may lead to a discussion about key person life insurance.

  • Sizable, retained earnings or significant profits could suggest a valuable business and, as a result, looming tax liability upon the shareholder’s death. This liability could be funded with life insurance.

  • Substantial investment income may provide an opportunity to use permanent insurance as a tax-effective strategy to reduce passive corporate income – which is subject to tax at high rates and may reduce or eliminate the corporation’s access to the small business deduction. For more information on the insurance planning around the passive income tax rule changes from 2018 see the article dated May 2023:    


Requesting financial statements is a key component of the sales process. Support in reviewing financial statements is also strongly encouraged. Depending on the complexity of the case and other factors, most advisors can draw upon the tax and legal resources available at our carrier partner firms as well as tap into their advanced planning teams at their respective dealer channels (such as myself). Financial statements can go a long way in providing insights into a business owner’s net worth and help us identify potential insurance needs and other estate planning opportunities.



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