Business Uses of Insurance and Annuities Flashcards
Buy-sell agreements: 2 types
- arrangement for the sale of individual’s interest in a business due to death or disability
1. Stock redemption (entity purchase)
2. Cross-purchase (stockholder agreement)
Stock redemption (Entity purchase)
- buy-sell agreement
- corporation buys stockholder’s interest using the LI proceeds
- better when there’s multiple owners
- corportaion is owner and beneficiary of the policy
- premiums are nondeductible
- DB is tax free to corporation
- other owners basis remain unchanged
- creditors can be attached
Cross-purchase (stockholder agreement)
- buy-sell agreement
- stockholder buys other stockholder’s interest with LI proceeds
- better with less owners
- LI purchased by each shareholder for each others lives
- premiums nondeductible
- DB tax free to individual beneficiary
- owner gets step up in basis
- deceased estate gets step up basis
- creditors can be attached
Benefits of a buy-sell agreement
- guarantees a market for the business interest
- provides liquidity for the payment of death taxes and other estate settlement costs of the deceased owner
- helps establish the estate tax value of the decedent’s business interest
- enables the business to continue in the hands of the remaining owners
- makes a business a better credit risk
Buy-sell step-up basis
Stock purchase
- company owns policy and receives benefits
- surviving individual basis remains unchanged
- deceased gets step up in basis
Cross-purchase
- individual owns the policy
- individual gets step up in basis
- deceased gets step up in basis
Disability buy-sell vs LI buy-sell
Disability
- deceased pays CG above basis
- family gets no benefits
LI
- family gets benefits
- deceased gets step up in basis
- proceeds with step up now in estate
Buy- sell agreement and transfer for value exposures
- individual can purchase own policy from corporation to avoid transfer for value
Key employee life insurance
- acquired to protect an employer against economic loss from the death of a valued employee
- business should be the owner and beneficiary to the policy
- premiums are nondeductible
- DB tax free
Split-dollar plan
- arrangement under which an employer and an executive share costs and benefits of a life insurance policy
1. Endorsement method
2. Collateral assignment method
The endorsement method
- employer owns policy and pays premiums
- employee’s beneficiary is named to receive employees share of DB proceeds
- employer retains CV or premiums paid if surrendered
The collateral assignment method
- insured employee is policyowner
- corporation lends employee the corporation’s share of premium
- corporation receives premiums paid at death or termination of policy
- employee gets CV or beneficiary gets DB
Business overhead expense insurance (BOE)
- policies cover the ongoing costs of operating a business while the business owner is totally disabled
- actual expenses are reimbursed (not salary)
- usually for 1 or 2 years
BOE - Sole proprietor
- premiums are deductible as a business expense
- proceeds are taxable
BOE - Corporations (Reg. and S)
- cannot deduct premiums
- can receive income tax free
Annuities description and types
- periodic payment from an account maintained by a life insurance company beginning at a specific or contingent date and continuing for a fixed period or for the duration of a life
Types - Immediate, fixed, variable
- accumulation, annuitization
- life, period certain, joint and survivor
