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Corporate-Owned Life Insurance
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Business owners have been using life insurance policies for financial strategy and estate planning. There are different purposes that a life insurance policy fulfils for corporations, trusts or even groups of corporations.
- Help in covering tax liability at the time of death.
- Make sure to have sufficient funding for any type of shareholder contract.t.
- Makes easy to start a capitalization program for shareholder policy.
There are certain conditions that policyholder must fulfill that needs to be considered to avoid any type of unexpected legal or tax-related problems.
Corporate-Owned Life Insurance policy is
- Bought in the name of one or more important employees.
- The premium is paid by the company.
- In case of the death of the policyholder, the company receives compensation.
Reasons To Invest In Corporate-Owned Life Insurance
Corporate-Owned Life Insurance is designed keeping in mind specific requirements of an organization. Several benefits make the policy an asset for the organization
1. One-time Tax-free Payout : Corporate-Owned Life Insurance offer tax benefits. The corporation will receive one-time payment that will be tax-free in case of death of the policy holder.
2. Comparatively Cheaper : The premium for a corporate-bought policy is less compared to life insurance bought by an individual. As the tax rate of an organization is lower, therefore, expenses made by corporate are less on after-tax criteria. Thus premium they pay is comparatively lower.
3. Premium Equalization : The corporation is responsible for payment of premiums, age or gender or health-related criteria will not impact or change the premium with time.
4. Cash Surrender Value : Corporate-owned Life Insurance can earn cash surrender values that are considered an asset for a corporation. The increase in the value of cash surrender value will be tax exempted till the policy is not cashed out.
5. Collateral Benefit :The policy has cash surrender value and thus can be put as collateral while taking any loan or for financial funding. The policy can also help corporate in enhancing the debt-to-asset ratio.
6. Ownership Continuity : In case of any shareholder change, there is no impact on the ownership of the policy. There is no need to make changes in ownership of the policy from one shareholder to another.
There are several reasons for corporate and companies to invest in Corporate-Owned Life Insurance but to avail of maximum benefits, certain tax-related rules and regulations must be followed. The policy offers financial, legal as well as tax benefits. The policy can be bought by a single corporate or a group of companies. If bought by a group, it is important to clarify who will be the beneficiary in case of the policy holder’s death and who will be responsible for paying the premium. If these crucial decisions are not clear within the group then it can result in conflicts along with financial as well as tax-related implications.
Limitations to Keep in Mind
There are certain limitations or disadvantages related to Corporate-Owned Life Insurance that you must consider before investing.
Liquidity : This type of policy is for the long run and liquefied at the time of your need. Therefore you must analyze your cash flow requirements and plan your investments properly before purchasing a Corporate-Owned Life Insurance policy.
Impact on lifetime capital gains exemption (LCGE) : Having a Corporate-Owned Life Insurance Policy can impact your access to LCGE on corporation shares. The policy is a passive business asset and the value of cash surrender value of the policy will decide if your corporation’s shares are eligible for LCGE or not.
To know more about benefits, limitations or anything related to Corporate-Owned Life Insurance Policy call us anytime.
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