Corporate Life Insurance

Did you know that life insurance can also be purchased and used by your corporation for a variety of issues that may arise upon your death?

It can be used to pay off corporate debt, shore up operating capital and buyout shareholders’ estates.

There are a number of different types of life insurance available that fall into two basic categories: “term” and “permanent”.

Owning life insurance in a corporation

A corporation can be a beneficiary of a life insurance policy. This generally allows the corporation to pay the premiums for that policy and collect proceeds upon the death of the covered person. In most cases, the premiums are not deductible but they can still be financed by corporate dollars, which is better than using after-tax personal dollars. Once the insurance proceeds are received, they are not taxable to the corporation and an equivalent amount (net of any adjusted cost basis) is added to the company’s capital dividend account which can then be paid out tax free to shareholders as a capital dividend. The adjusted cost basis of the policy is determined by the insurance company and is calculated by subtracting the annual pure cost of the life insurance from the premiums paid.

It’s important to ensure that any corporate owned insurance policy names the company as the beneficiary and policy owner, and names the shareholder as the covered person.

What are some practical uses for corporate owned life insurance?

Estate tax and equalization – Important for family-owned corporations where the major part of the value of a person’s estate is within the shares of the company. The estate may have multiple beneficiaries, some of whom are not involved in running the company. Once the estate assets are divided among the family members there may not be enough cash to pay tax on the deemed disposition of shares let alone provide equivalent value to the uninvolved beneficiaries. Paying into an estate via corporate-owned life insurance can fund tax liabilities and equalize the value among beneficiaries.

Loan protection – Lenders require that business loans be personally guaranteed by the owner and in some cases, lenders may also require life insurance for key people for the duration of the loan. It’s a good practice to have life insurance to avoid any debt owed upon your death not become a liability of your estate. Corporate life insurance also improves your business’ ability to obtain financing.

Key person protection – Corporate life insurance can provide a business with the cash flow needed for working capital or to repay debts, or to provide the funds necessary to hire and train a replacement when a key executive dies.

Buy-sell agreements – Corporate life insurance is frequently used by private companies to fund buy-sell transactions that are triggered by a shareholders’ agreement upon death.

As you can see there are many benefits and flexible planning opportunities when purchasing and using life insurance through a private corporation, there are additional complexities to consider. Corporate tax issues, shareholder agreements, accounting for permanent insurance balances and additional compliance for capital dividends are just a few. I can help guide you to make the best choice for your corporation. Sleep better knowing that I am on your side to protect your business.