Does Your Corporation Need Life Insurance?

Typical life insurance can be used by individuals to cover debts, final expense and provide financial stability to loved ones after death. Business owners are often surprised to learn there is also life insurance that can be purchased by your corporation.

Owning the life insurance policy

When a corporation is the beneficiary of a life insurance policy it will allow the business to pay the premiums and collect the proceeds upon the death of the insured. Although the premiums are not tax deductible, it can be paid using corporate dollars. For the business owner, this is a an attractive option compared to using after-tax personal dollars.

When a benefit is received, it is not taxable to the corporation and an equivalent amount is added to the companies capital dividend account. This money can then be distributed to shareholders as a tax-free capital dividend.

Common reasons for corporate life insurance

Estate tax and equalization

There are many situations where shares of a family-owned business is a large portion of the business owner’s total estate value. If the estate has multiple beneficiaries that are not involved in running the company, they will likely want to cash in their shares, leading to a deemed disposition. In this scenario there may not be enough cash on hand to pay the tax. By paying the life insurance proceeds to an estate through the capital dividend account, the insurance will fund tax liability and equalize an estate.

Loan Protection

We think to protect our personal debts with life insurance but neglect to do so in our corporation. For small businesses, lenders will often require loans to be guaranteed by the business owner. In most cases, life insurance will be required by the lender. Even if it is not, it is a good idea to have it to reduce risk personally and to the business.

Key person protection

Every business has key people that are vital to the company. Whether a shareholder, or core employee they are considered vital to the company and not easily replaced in the short term. This loss can be extremely disruptive to the business and can cause problems with overall efficiency and profitability. In this case life insurance can provide the company with the needed working capital to maintain cash flow, repay debt or provide necessary funds to hire and retrain a replacement.

Buy-sell agreements

In a company with multiple shareholders, life insurance is often used to provide needed funding to buy-sell transactions that are triggered by a shareholder’s death. In almost all scenarios, the remaining shareholders are not interested in having the deceased family involved with ownership and future operations. Life insurance proceeds are used to ensure business operations continue, while providing necessary funds to the deceased family.

As you can see there are many benefits to having a life insurance plan for your corporation. This tool can be flexible for many situations while providing business owners with comfort. Working with Founders Wealth we can plan for you and your specific insurance needs.