Chapter 16 - Life Insurance In The Business Setting Flashcards
Business Life Insurance
Note: Both individual and business policies (not group, group can deduct premiums), you buy these policies after tax and it grows tax deferred. If the policy is paid out prior to 100, you cash out or surrender it, you pay taxes. If the person dies the beneficiary receives the money tax free.
Key Employee Life Insurance: The insured is an important person at a business. This is an example of third party policy as the business owns the policy and is the beneficiary. No tax deduction for the business. The insured has to sign the application form to give the business consent. The benefit helps the business pay for recruiting, hiring, training the replacement and decreased revenues.
Business Continuation Plan (Buy-Sell Agreement) - a contract for the death of an owner. A surviving owner has the right to buy their share of the company from the dead owner’s estate at an agreed upon price.
-There are two ways to fund a Business Continuation Plan…
-Entity Purchase Plan - for lots of owners, the company buys a life policy on each owner. They would use the death benefit to purchase their share. When the business is a corporation, this is called a STOCK REDEMPTION PLAN.
-Cross Purchase Plans - same as above expect the owners own the policies. Each owner pays the premium and would receive the death benefit, the business plays no role. If there are 3 owners, each would buy 2 policies to cover the other two owners, thus 6 total policies.
Split Dollar Plans - both the employee and the business split the cost of the life policy. The business can get some of the death benefit, sometimes just the premium they paid.
Deferred Compensation Plans: an employer pays an employee’s life policy in the future with compensation they could get today.
