Life insurance is used for two general purposes in a private corporation – managing risk and creating opportunities. The risk management function is satisfied as life insurance provides the corporation with a tax-free payment in the event of the death of an owner or someone vital to the success of the business. As life insurance can allow for the tax-sheltered build up of cash value, additional planning opportunities are created.
The primary needs for corporate owned life insurance are as follows:
Key Person Life Insurance
Any prudent business would insure its company facilities and equipment that is used in creating revenue. It follows then that the business should also insure the lives of the people that run the company and make the decisions which contribute to its success.
Funding the Shareholders or Partnership Agreement
When more than one person joins together to own a company or partnership, it is common business practice that there be a Shareholder’s or Partnership Agreement. These documents set forth the terms and conditions under which the parties co-exist in the business venture. It also spells out the financial interest that each hold in the concern and how much would be owed to the heirs of a shareholder or partner should that individual die. The use of life insurance owned by the corporation for this purpose guarantees that sufficient funds will be available to facilitate the agreement.
Corporate life insurance is also used to:
- Repay debt
- Look more favorably to lenders and investors.
- To assist family business succession.
- Estate planning.
- Sheltering of Corporate Investment Income.
- Protecting the Small Business Income Tax Rate.
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