Life insurance is an important part of the business for protection and also as an asset. Life Insurance can be used as a tool to provide liquidity in the event of a death and also to build wealth. There are seven key situations where corporate-owned life insurance makes sense.
Liquidity in the Event of a Death
- Key Person Insurance – In the event where the loss of a key person can mean a monetary loss for the company
- Buy/Sell Insurance – This can be used to fund a buy/sell arrangement between two or more partners
- Estate/Succession Planning – This helps to transfer shares of the corporation to family, other business partners, or charity
- Taxes – Life insurance can be used to pay off taxes. Taxes at death are typically the largest bill when shares are divested
- Charitable Giving – Life insurance funds can be used to donate money to charity
- Enhance Investment Returns – Investments inside an insurance policy grow on a tax-sheltered basis. This can help increase investment returns
- Estate Equalization – Life insurance can help business owners distribute family assets fairly and equitably. In many cases, not all children are involved with the business
Advantages of Corporate Owned Insurance
- Premiums are paid by corporate after-tax dollars. This is typically less expensive than paying with premiums with after-tax personal dollars
- Life insurance proceeds can be paid to shareholders without tax through the capital dividend account
- Premiums can be tax deductible (only if it is required to secure financing)
Disadvantages of Corporate Owned Insurance
- No creditor protection. Personally owned policies are creditor protected. Corporate policies are not.
- Capital losses can erode the amount of life insurance proceeds paid out tax free to shareholders.
- Certain policies can increase the share value of your corporation at death. This can increase the cost if family members want to purchase the shares of the business.
- Certain policies could also be viewed as a passive business asset. This could risk access to the small business tax rate.
Keep in mind that, each person’s situation is unique. We can help you figure out what makes sense in your situation.
Immediate Financing Arrangement
An Immediate Financing Arrangement (commonly known as an IFA) is a financial planning strategy which combines life insurance coverage with tax advantaged wealth accumulation.
Split Dollar Critical Illness
Split dollar critical illness insurance is a strategy where a corporation and key employee/shareholder to purchase a critical illness insurance policy. The split dollar arrangement is a formal legal agreement between the parties that addresses:
- Allocation of premium costs
- Ownership interest
- Share of rights and benefits
Corporate Insured Retirement Program
For business owners, retirement benefits can be tied into their business, therefore the corporate insured retirement program can be an effective strategy for business owners/shareholders to receive retirement benefits through their corporately owned permanent life insurance policy.