What is corporately owned life insurance? Simply put it is a life insurance policy that is owned by an incorporated business instead of an individual. It has several purposes, the most common being the protection of a profitable business from the death of the owner or key employee.
Corporately owned policies can also be used to enhance the value of an estate for a shareholder or fund a buy-sell agreement between multiple partners. Taking the time to carefully look into the details of structuring a corporate life insurance policy that fits your specific situation can have a tremendous impact on the profitability and future of your business.
Corporate policies function, in some ways, similar to a private life insurance policies. However, the corporate policy may offer several key advantages that private policies simply cannot match. When a company has a true insurable interest in a shareholder or key employee, a corporate life insurance policy can be an effective way to provide tax free cash quickly when needed most.
A few advantages of corporately owned life insurance include:
- Coverage in the event of the death of a key employee
• Premiums are paid on a pre-tax basis
• Protection against a key employee(s)
• Build estate(s) for shareholders
The last point about estate enhancement is in reference to the unique ability of a corporate life insurance policy's ability to build up tax-deferred cash value within the contract. These policies come in the form of Whole Life or Universal Life. There are several ways to structure a plan with flexible options to access cash from the policy in the future.
There are some basic criteria for purchasing a corporately owned life insurance policy. Many insurance providers will require financial statements to provide evidence to steady profits and stable cash flows. The other is that there is a short or long term need for the protection from the loss of a key employee or owner, which in the industry likes to call “insurable interest”. The individual that the company is interested in having insured must complete a detailed questionnaire and medical exam before the coverage takes effect. It is not un-common for the approval process to take 6-8 weeks.
Depending on your needs and specific business situation, term insurance may be the best fit. There are also some alternatives available in the event of your key employee or owner being un-insurable (unable to pass the medical exam). Keep in mind that like with any life insurance policy, corporately owned life insurance is issued and priced based on the age, health, lifestyle and family history of the life being insured.
The information in this material is derived from various sources. Material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact us for benefit, pension and insurance advice based on your corporate or personal circumstances.