Business Life Insurance

Life Insurance in the Business World

Life insurance plays a number of important roles in the business world, benefiting business owners, employees, and family members.

The loss of a business owner or a key employee can seriously damage a small business or even result in the business closing its doors. Advance planning can help cushion the impact of such events.

• Death of a business owner:
  If a business owner dies, a buy-sell agreement can provide a smooth transition of total ownership and control to those who will keep the business going. For a corporation, a stock-redemption agreement may be used to ease the transfer of the deceased owner’s shares to the surviving shareholders. Life insurance is frequently used to fund these types of agreements.
• Key-employee insurance:
  Life insurance on the life of a key employee helps to cover the costs of finding and training a replacement, as well as meeting any monetary obligations to the deceased employee’s survivors.

There are many ways in which life insurance is used in accumulating funds for retirement:

• Fully-insured defined benefit retirement plan:
  RC Sec. 412(e){3) allows for the use of annuities and/or life insurance policies to fund retirement.
• Life Insurance inside qualified retirement plans:
  Federal income tax law allows defined benefit retirement plans and certain types of defined contribution retirement plans to allocate a portion of the funds contributed each year to life insurance as a retirement funding vehicle.
• Nonqualified deferred compensation:
  These arrangements allow selected employees (the employer can pick and choose) to defer receipt of a portion of their compensation until a later date. These plans do not meet federal income tax requirements to be considered “qualified” plans. Life insurance can be used to informally fund such arrangements.

Life insurance also plays a significant role in estate and survivor needs planning:

• Group term life insurance:
  Group term life insurance can be provided to the employees of a business, with premiums generally much lower than individual term life policies. Generally, the first $50,000 of such coverage is tax-free to the employee.
• Executive life insurance:
  An employer can help fund employee-owned, individual life insurance policies for selected executives or key employees through either a “bonus” plan under IRC Sec.162, or as a part of collateral assignment split-dollar
• Death benefit only plan:
  A Death Benefit Only (DBO) plan is a form of deferred compensation plan. In a DBO plan an employee defers a portion of his or her compensation. No benefits are payable during the employee’s lifetime. At the employee’s death, the deferred compensation is paid to the employee’s named beneficiary, with the entire benefit being taxed as ordinary income.

Correctly used, Life Insurance is a highly useful tool in the business world. However, careful attention must be paid to federal, state, and local law to ensure that all legal requirements are met. The guidance of knowledgeable legal, tax, employee benefit, and life insurance professionals is strongly recommended. Insurance can be used to informally fund such arrangements.