When hearing the term “life insurance”, most of us will think of personal life insurance which covers for debt, funeral, and financial support for dependents after your death. However, life insurance can also be purchased by your corporate and it can be used for several purposes to protect the corporate against some raised issues after the death of key person or shareholders. In general, corporate life insurance can fall into 2 main types:
- Term life insurance – this policy can be considered as a key component for investment, which grow tax-free in the policy and may increase the proceeds of the policy on the death of the insured
- Permanent life insurance – this type of insurance is more complicated and very different from one policy to others. When deciding to go for this type of insurance, you should discuss into details with your insurance advisor to ensure understanding all the hidden gems.
In each situation, the amount and type of policy will be varied and depending on the requirements of each situation. We can review the coverage on a regular basis
Key-person life insurance
In this situation, the corporate owner will define who the key person is. By the key-person insurance, the company will have quick access to the funds and allow a remaining owner deploy a successful strategy to keep the business running. It’s important to make sure that the company is named as a beneficiary and policy owner, and the key-person as an insured person.
Life Insurance used to fund capital gains as tax on death
Considering a large tax bill will be due at the death of corporate-owner or shareholder, this amount will be deducted if the owner or shareholder passes their shares to family members. Then they can purchase a life insurance to provide a fund to pay the taxes when they pass away. Once the insurance proceeds are received, the policy can be paid as a tax-free capital to the dividend account of the shareholder and the company. In the scenario where company has multiple shareholders, life insurance policy can help to reduce the stress on the remaining. In order to be able to pay the shares owned by the deceased, it may be specified on the agreement that shareholder hold insurance on the shareholder’s lives.
Estate Tax and Equalization
In the case, family owned business has shares involved in major part of their estates’ value, and the estate has multiple beneficiaries, including those who not involved in the business. Typically, the shares of corporate will be divided among the remaining family members, and they may not be enough cash to pay tax on the deemed disposition of shares. The corporate owned life insurance will be able to receive the proceeds to fund tax liabilities and equalize the value beneficiaries. In some small businesses, having life insurance can also improve business’s liability for obtaining financial loan.
Corporate life insurance can be considered as an important factor for investment. However, there are still risks and complicated issues that should be aware of. It’s always wiser to talk with insurance advisor to clearly understand what is suitable for your needs and future plan.