Selling Life Insurance

Question 1

Executive Bonus Plan

Answer 1

nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. bonus is tax deductible to the employer. employee uses bonus to pay premiums on life insurance. employee is owner of the policy. if employee withdraws from, surrenders or takes loans from the policy, the funds are taxed as ordinary income to the employee

Question 2

Key Person Policy… if key person leaves company

Answer 2

company can surrender the policy for cash, assign the policy, or keep it in force. the key person cannot convert the policy to an individual policy. premiums are not deductible, proceeds received are not taxable.

Question 3

Cross-Purchase Plan

Answer 3

stockholders purchase the interest of the deceased stockholder as individuals

Question 4

Stock Redemption Plan

Answer 4

corporation purchases the deceased stockholders shares.

Question 5

in the case of multiple stockholders, which is better?

Answer 5

stock redemption plan requires fewer policies than a cross-purchase plan

Question 6

Deferred Compensation Plan

Answer 6

most are unfunded, and therefore employee cannot rely on guaranteed future benefits. employer receives no tax deduction until the compensation is actually distributed.

Question 7

Cross-Purchase Buy-Sell Agreement

Answer 7

partners individually agree to purchase a proportional interest of the deceased partner. the executor of the deceased’s estate is directed to sell the interest to the surviving partners.

Question 8

partnership buy-sell entity plan

Answer 8

insurance is owned by the partnership

Question 9

sole-proprietor buy-sell plan

Answer 9

funded by a life insurance policy purchased by an employee or other party on the life of the proprietor will transfer the business from the owner to the other party at an agree-upon price. the agreement must be drafted by an attorney