Corporate-owned life insurance delivers security and opportunity
Corporate-owned life insurance can provide protection and opportunity to grow your business. Life insurance policies can protect shareholders and their family members, the corporation itself, and key people in the business. Furthermore, corporate-owned life insurance can be used as collateral for a loan, capital for a buy-sell agreement or tax and estate planning for a business owner or shareholders of a corporation. This type of policy can be funded using a term life, a whole life or a universal life insurance policy. Businesses should consider life insurance planning for key people. Whether it is a small business owner and its employees or the c-suite corporate employees, it makes sense to have it in place.
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What type of life insurance policies are available?
Life insurance policies are generally available in two types: term or permanent. Term life is a great product designed to cover temporary obligations for large coverage amounts while being the most cost-effective. On the other hand, profitable businesses should consider permanent policies that can grow in value over time rather than delivering just life insurance. These are the main characteristics of each type:
Term Insurance (cost-effective)
- Provides coverage for a specific term, typically 10, 20, 30 years or longer
- Premiums stay the same for the duration of the term
- Relatively inexpensive form of life insurance
- Typically used by businesses to provide funds in the event of:
- The business owner dies to replace the loss of income and cover liabilities
- The key person dies to provide the replacement training and development
- Can be converted to permanent insurance for tax planning in later years
Accelerated underwriting (no fluids or biometrics) may be available for up to $3,000,000
Permanent Insurance (tax & estate)
- Provides guaranteed coverage for life
- Three main types of permanent policies include:
- Simple whole life with guaranteed cash value
- Participating whole life that pays dividends
- Universal life that allows for choice of investment
- Can provide both insurance protection and a tax-deferred investment component
- Includes a cash value component that accumulates over time and can be used as collateral for borrowing
- In the event the policy is voluntarily terminated before death or maturity, the cash surrender value is paid by the insurer to the policyholder
- Often used as part of estate planning to build value over the long term and cover estate taxes
What are the common uses of corporate-owned policies?
There are tax benefits of owning life insurance within a corporation. These benefits may include accumulating wealth and transferring that wealth to family members in a tax-efficient way. The suitability of different policies will depend on various tax and non-tax factors. We suggest you consult one of our advisors to explore different options and contact your tax advisor, who can help you assess any tax implications specific to your situation.
Life insurance on the lives of the shareholders means there will be immediate funding available to purchase their shares in the event of a death or disability. Life insurance is more cost-effective and convenient to fund a buy-sell agreement than other options such as using borrowed money, liquidating assets, creating cash reserves, or using after-tax corporate profits. At the same time, the shareholder can utilize the tax-efficient nature of life insurance to achieve their estate planning goals.
This type of coverage is common for small to medium businesses where there are one or more key people; whose death, disability or critical illness would significantly hurt the organization. Often people think of a key person as only a shareholder. Still, a key person can also be a hired executive or anyone whose death, disability, or illness will harm the business’s financial health. The most common formula for determining coverage is five to ten times the person’s compensation.
It is common for lenders such as banks and other financial institutions that lend money to small businesses will ask the borrower to provide life insurance on the lives of the key shareholders or employees as a condition of lending. Having life insurance will help you be in the proper position if this need comes up. The loan interest may be deductible, subject to certain conditions.
Life insurance can provide a very tax-efficient way to enhance or create an estate. It can be used to pay taxes due upon death thereby protecting the value of the estate for the beneficiaries.
It is common with family businesses that not all of the children want to or are suited to, work in the business. The parents want to see the child that runs the business inherit it, but also want the other children to be treated fairly. The best solution for this is with life insurance – no other financial asset delivers liquidity when it is needed like life insurance.
Similar to how personal life insurance policies can be an effective tool for individuals to donate to charity, corporate-owned policies can also be used tax effectively while still providing legacy giving for the insured. Either new or existing corporate-owned policies may be used to benefit a charity in several ways:
- Policy ownership assigned to the charity
- Use it to fund an estate gift
- Use it to fund corporate gifting
Real-life story and the value of a key person
We had an employer who was importing safety supplies. One employee was responsible for over 50% of the company’s sales due to his time in the industry and experience. The owner estimated that if something were to happen to him, his sales could decrease by 30%, and it would be challenging to replace him without sufficient short-term capital. The owner became aware of the option to set up a key person policy and took action immediately to set one up. Our advisor working with this business owner presented an excellent case and a cover letter to the insurance company supporting the reasons. We put in place a key person policy of over $700,000 of coverage which was far more than twice his salary. Sadly, the key person died in a motorcycle accident a few years later, but the business did survive and continues to thrive today.
Compare key person life insurance quotes online
The quickest and most reliable way to compare key person insurance plans is to get multiple quotes from an online rate comparison service like IDC Insurance. Not only will you be able to compare life insurance quotes from several top-rated companies, but you’ll be able to do so from the comfort of your own office or home. You’re free to do it at your own pace, so you can take however much time you need to feel confident about your decision. Our accredited insurance agents will help guide you through this process and assist you in buying the best key person life insurance for yourself, your business partner or a key person in your company when you’re ready.