Life insurance can also be used to benefits a business or company.
How?A business can choose to cover its shareholder or any other valuable member with a corporate owned policy to mitigate future tax liability. In such arrangements, the corporate is allowed to pay the insurance’s premiums for that policy and thereafter collect the proceeds when the insured individual passes away unexpectedly.
Below are common uses for corporate owned insurance policies.
Protection from Acquired Loans
More often now, lenders will require personal guarantees when lending to the business and the shareholders will be on the hook in case of default on a loan. Lenders are now asking for life insurance policies for shareholders and key individuals in the corporation. In this case of an unexpected death. The estate may be held liable and forced to pay financing debts. Additionally, it can boost a business capability to obtain external financing since some lenders prefer borrowers with such kinds of insurance – this is a good practice to have even when lenders don’t require one.
Easier Adjustment
When a key person in a company or business dies, depending on their position, the company may suffer an immeasurable blow. It may take some time and financial implications to find someone else to take over and stabilize the company’s operations. A corporate life insurance will provide finances needed to shore up working capital and take care of financial needs to cover up the individual’s ability to generate cash flow.
Buy-out the Estate
The company can use the insurance policy proceeds to buy shares owned by the deceased from the named beneficiary. Usually shareholder agreements will set out the terms in case one of the owners passes away. This is especially applicable when the person named as the beneficiary is either not interested in the business or does not possess useful knowledge to run the business. In such a case, the company can buy out the shares owned by the estate or beneficiaries and continue business operations while providing cash flow to the deceased estate/beneficiaries. The proceeds can be used to redeem shares or can be paid as a capital dividend to fund a personal purchase of shares from the deceased’s estate.
Fund Tax Liabilities
If a shareholder passes away and the estate with multiple beneficiaries may not have enough funds to fulfill tax obligations imposed on the deemed disposition of shares and at the same time provide equal value of the estate to all beneficiaries. Some beneficiaries may be directly involved in the business and are given the share of the business and the ones who are not involved will be left over after paying out the tax liabilities and shares to the involved members. This situation may lead to some members acquiring lesser value of the estate. Proceeds from corporate life insurance can be used to pay an estate through a capital dividend account and equalize the value of beneficiaries and pay out the tax liabilities.
Enriches Shareholders
Not only does corporate life insurance provide cushioning for the company in case of death of its members but it can also build the wealth of the estate and its beneficiaries. The net of any adjusted cost basis of the insurance proceeds can be added to the company’s dividend account and be distributed to individual shareholders as dividend- tax free.
Need Corporate Insurance?
Before acquiring a corporate insurance, find out the specific details about it to ensure it will suit your needs as a private company and shareholder. You should consult with experts such as legal advisors, accountants and insurance advisors so as to make an informed decision before committing yourself to the insurance and to make sure the policy is set up correctly. However, you should note that, organizations are not cut out from the same cloth. What worked for another company, may not work for you so it’s important to seek the proper advice before signing onto a policy. We can refer you to our list of trusted advisors to get you in the right direction.
