Corporate-owned life insurance can help protect the business, create liquidity when an owner or key person dies and, in the right circumstances, become part of a longer-term estate and corporate wealth strategy.
A business can look financially strong and still be highly dependent on one owner or key person.
The bigger question is not simply, “How much life insurance should the corporation buy?”
It's what money would need to accomplish if an owner, partner or key employee died unexpectedly.
Corporate-owned life insurance is a policy owned by a corporation. The insured person may be a shareholder, owner, executive or another important person in the business.
In a common arrangement, the corporation owns the policy, pays the premiums and is also the beneficiary.
The insurance may be used for key-person protection, shareholder buy-sell funding, business debt, estate liquidity or long-term permanent insurance planning.
Life insurance has several roles: owner, premium payor, insured person and beneficiary.
In many corporate arrangements, the corporation owns the contract, pays the premiums and receives the death benefit.
The business owner or key person is the life insured.
That distinction becomes very important when tax, shareholder and estate planning are involved.
Some businesses are unusually dependent on one person for sales, client relationships, operations, financing or technical expertise.
If that person dies, income can fall while payroll, rent, debt and other expenses continue.
Corporate-owned insurance can give the business financial breathing room while it adjusts.
When a private corporation receives life insurance proceeds because of an insured person's death, the proceeds are generally received without inclusion in ordinary corporate taxable income.
Broadly, the death benefit above the policy's adjusted cost basis immediately before death may create a credit to the corporation's Capital Dividend Account.
The corporate-owned life insurance claim becomes payable.
Death proceeds are generally received without inclusion in ordinary taxable corporate income.
Generally based on proceeds less the policy's adjusted cost basis immediately before death.
With sufficient CDA balance and the proper election, eligible capital dividends may be paid to shareholders.
When one business owner dies, their shares may become part of their estate.
The surviving owner may want control of those shares, while the family may prefer cash rather than ownership in a private company.
Life insurance can help create liquidity instead of forcing the surviving owner or corporation to suddenly find financing.
An established corporation may accumulate more cash than it needs for payroll, taxes, debt and normal operations.
If the business also has a genuine permanent insurance need, whole life or universal life may be worth considering as one component of long-term corporate planning.
The important order is: business liquidity first, permanent insurance need second, product strategy third.
Business owners often have a significant portion of their wealth tied up in company shares, real estate or other assets that cannot simply be turned into cash overnight.
Permanent corporate-owned insurance can create liquidity at death when the estate may need money for taxes, estate equalization or other obligations.
The objective is not necessarily to make the estate larger on paper — it's to make sure there is cash available when the family actually needs it.
The type of insurance should match how long the business actually needs the protection.
Term life can provide larger amounts of protection at a lower initial cost when the business need is temporary.
Whole life or universal life may be considered when the business or estate problem is expected to exist whenever the owner eventually dies.
We begin with what happens to the business, the shareholders and your family if you aren't there tomorrow.
Once the need is clear, we can look at whether term, whole life, universal life or a combination deserves consideration.
Business owners still have personal mortgages, families and income-replacement needs outside the corporation.
Use free calculators and planning tools to better understand insurance and family financial decisions.
View ToolsEstimate your mortgage, debts, children and personal income-replacement needs outside the business.
Calculate My NeedsOwnership, taxation and insurance are separate questions. Understanding each one makes the overall strategy much clearer.
Tell us about your business, ownership structure and what you're trying to protect. We'll help you understand the insurance options and coordinate with your tax and legal professionals where appropriate.
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