Business Use Insurance

Question 1

Buy-Sell Agreements

Answer 1

• must contain commitment of the parties involved.
• contractual and should state clearly the obligation of all interested parties in the contract.
• must state the purpose of the arrangement.
• must state or provide a formula dictating the purchase price of the business interest. —-The price must provide a value for the selling and buying price of the business.
• should specify how it should be funded.
• can be funded by life insurance, cash, installment payments, and borrowing.
• If funded with life insurance, the agreement should state the type of life insurance and how the life insurance is to be paid for.
• should also contain transfer restrictions.
• guarantees a market for the business
• provides liquidity
• determines estate tax value
• business will continue in hands of remaining owners
• better business credit risk

Question 2

Stock Redemption Entity Purchase

Answer 2

This is an agreement that states the ownership in the business will be purchased by the entity. This agreement is more beneficial for larger businesses with several interested parties.
Corporation owner and bene of life ins

Premiums not deductible
Death Benefit tax free
Life insurance can be attached by creditors
Basis step up if died owning the stock and value pulled into estate
Co

The proceeds received by the C corporation can generate an alternative minimum tax.

Question 3

Cross Purchase Agreement

Answer 3

Between two or more owners or shareholders stating that in the event ownership must be transferred the other owners of the company will purchase the business interest. This is the most common form of agreement.

Premiums are not deductible
Death benefit tax Free
Life insurance can’t be attached by creditors
Step up in Basis
New owner basis = to buy/sell price plus their basis

In a cross purchase agreement the cash value of the policies owned by the decedent on the other shareholder’s lives is considered in the decedent’s estate. But, the policies owned by the other shareholder’s on the decedent’s life are not considered in the decedent’s estate.

Question 4

Key Employee

Answer 4

• Business is owner and beneficiary
• nondeductible
• benefits tax free
• Large “C” corporations will have to include the policy benefits for purposes of calculating the Alternative Minimum Tax.
• Premiums paid by the corporation will not be included in the insured’s taxable income provided that the insured has no current ownership in the policy.
• Provides the corporation or business benefits in the loss of income derived from the death of a key employee
• peace of mind to the corporation or businesses creditor’s that are fearful of the company’s future in the case of a key-employee’s death.
• Shareholders peace of mind.
• Can protect the financial interest of investors in the case that the key-employee is the business.
• Can insure a key-employees retirement giving the cash surrender value of the policy to the employee upon the employee reaching retirement (not dying before retirement).
• if the proceeds are payable to any person/entity other than the corporation the proceeds are considered in the insured’s gross estate.

Question 5

Split Dollar Plan

Answer 5

The policy can be used as an incentive or as a form of deferred compensation. A split-dollar life insurance policy can be beneficial to both the employer and the employee.

The policy can be shared and split in several ways…

Cash values
Premiums
Death Benefits
Ownership
Dividends

Question 6

Endorsement Method Split Doallar

Answer 6

Employer owns the policy and pays the premiums on the policy.

• Employer will receive the total of all premiums paid if the cash value is surrendered
• Corporation is primary bene to extent premiums paid
• remaining proceeds are paid as the primary beneficiary and then pays the remaining balance to the employee’s secondary beneficiaries.
• Employee is not a shareholder
• Absolute assignment -no right to change bene and is removed from estate
• Employee can buy policy for greater of cash value or premiums paid

Question 7

Collateral Assignment Method Split Dollar

Answer 7

Employee owns the policy and the corporation loans its share of the premium payments to the employee.

• Employer hold the policy as collateral
• Employer will receive the total of all premiums paid if the cash value is surrendered or proceeds are paid to the employee’s beneficiaries. The primary beneficiary is the employees’ choice it is not the business or corporation.
• Employee is a shareholder

Question 8

Business Overhead Expense Insurance

Answer 8

Cover Ongoing cost of running business while owner is totally disabled.

Actual expenses - not owners salary 1-2 yrs

Sole Proprietor - Premiums are deductible
- income is taxable
Corporation- Premiums are not deductible
-income tax exempt

Question 9

Advantages Split Dollar Plan

Answer 9

Advantages Employee

• Able to obtain life insurance cheaper.
• The employee can protect his/her family in the event of their untimely death
• When an employer pays the premiums the employee may be able to reduce their income tax liability (if the employee is in a higher tax bracket).
• Can provide for estate liquidity in the event of the employees death

Advantages Employer

• The employer can provide low cost benefits to it’s employees
• The portion of the premiums paid by the employer for the benefit of the employee can be deducted for tax purposes by the employer
• The employer will receive the total of all premiums paid on behalf of the employee upon the employee’s death
• The plan can be designed so that the employer retains complete flexibility.
• The arrangement can be used as an incentive to the employee

Question 10

Disadvantages Split Dollar Plan

Answer 10

Employer
No tax deduction

Employee
Must pay tax each year on economic benefit received from plan
Plan must remain in effect for a long time to be beneficial
Sarbanes Oxley eliminated benefit to officers and directors