Corporate-owned life insurance is an instrument that alleviates the financial needs of an organization and its top executives or shareholders. Here is a look at some of the benefits that make corporate-owned life insurance policies an appealing asset for many corporations.
Savings On Life Insurance Premiums
Paying the premiums on an individual’s life insurance policy through a business can be a more cost-effective way of obtaining life insurance as corporations enjoy a better tax rate than individuals. This also means that for the same amount of money in premiums, a corporation can obtain a bigger policy on the shareholder than they could have gotten themselves using their income. Because life insurance premiums are payable for many years and often over an insured person’s entire lifetime, the savings can add up significantly over time.
Tax-Free Death Benefits
If the insured individual passes away, the proceeds of a corporate-owned life insurance policy taken out in their name can be paid to the individual’s estate or other beneficiaries of their choosing with little to no capital dividend tax in many cases.
It Can Offer Protection From Creditors
A life insurance policy that is owned by a corporation on an executive can be used to shield them from creditors or other institutions looking to case their benefit after death. It may also be possible to set up a structure wherein death benefit proceeds that are paid out can be shielded from the business’s creditors as well.
More Streamlined Management
When a corporation owns multiple life insurance policies for a series of individuals, it is easier to manage them centrally and handle all the tasks involved in owning such a policy, such as making premium payments, validating policy status, filing claims and using cash values.
Equitable Distribution Of Insurance Premiums
Each individual’s life insurance premiums will vary depending on a variety of personal factors, such as health status and age. Corporations can pay for the premiums for several of their key executives, with each executive proportionately assuming the cost of the premiums that the corporation is paying for, as well as the potential benefits. This typically creates a more equitable distribution of the premiums than having each executive pay for their policy.
Tax-Preferred Cash Value Accumulation
A major tax benefit of corporate-owned life insurance policies is converting the cash surrender values into an asset of the business. Unrealized gains in the policies’ cash surrender values are exempt from taxes unless the cash values are withdrawn or the policy is cashed in. This means that corporations can diversify their asset mix and avoid the need to pay taxes that would otherwise be payable on their regular investment income.
It Can Serve As Collateral For A Loan
A corporate-owned life insurance policy can be used by a business as collateral for securing funding. Many times, small businesses will be required by lenders to provide a personal guarantee on the loan by the owner, and the lender may also require key individuals within the company to obtain life insurance for the loan’s duration. These personal guarantees could be a liability of the individual’s estate, which means that their estate may have to pay outstanding debts that the business cannot pay. In such cases, the payout on corporate-owned life insurance could cover this expense.
These policies can also help a business improve its chances of obtaining financing. If the life insurance policies have cash surrender values, they can also improve the business’s debt-to-asset ratio.
It Can Help A Business’s Shareholders Purchase A Deceased Business Owner Or Partner’s Shares
Another benefit of corporate-owned life insurance is that it can fund buy-sell transactions triggered by an agreement between shareholders if one of them passes away. Many times, surviving shareholders do not wish to have their deceased partner’s families involved in their company, and this feeling is often mutual as some families will not have a desire to remain involved in the business and forgo the proceeds of the deceased person’s estate.
In these cases, the proceeds of a life insurance policy can be used to buy out the shares that were owned by the deceased shareholder. Doing so ensures the business can continue while providing the deceased’s beneficiaries with cash. There are several ways to do this, such as by paying the proceeds as a capital dividend to cover a personal purchase of shares from the person’s estate, or the proceeds can be used for redeeming shares.
Reach Out To The Life Insurance Professionals At Vector Benefits
Purchasing life insurance through a private corporation comes with many benefits and is often a sound strategic move. However, many complexities must be considered, including corporate taxes, shareholder agreements and compliance with capital dividends. Therefore, it is important to discuss your goals with professionals to ensure you are using the right strategy. Call the associates at Vector Benefits today to discuss setting up a policy that matches your corporation’s needs as well as those of your key executives.
