Business Owned Life Insurance: Who Can Buy a Policy?

May 1, 2022

If you’re an entrepreneur, you might be wondering, “Can a business own a life insurance policy?” The short answer is yes. But before you buy, find out why business owned life insurance is so important and which type of policy offers the most benefits for your company.

5 REASONS WHY BUSINESS OWNED LIFE INSURANCE MAKES SENSE

Business owners can use life insurance for a variety of reasons. Here are a few you might consider for your company:

It can help generate business capital.
It can be used as a tool to attract and retain high quality employees.
It can provide a business succession plan.
It protects against the loss of business partners and other key employees.
It offers unique tax benefits.

LIFE INSURANCE FOR BUSINESS OWNERS

If you own a business and are shopping for an insurance policy that offers the benefits listed above, chances are you’re looking for a type of policy called Key Person Insurance. There are a few different types of key person insurance policies, but using dividend-paying whole life insurance as key person insurance is the most common.

Whole life insurance earns a guaranteed rate of return and non-guaranteed dividends. Together, these benefits grow wealth in the policy that can be borrowed tax-free for business capital. The company who purchases the policy is the owner and beneficiary. It is responsible for paying premiums and it will receive a payout when the insured employee passes away. Policies can be purchased on any individual whose passing would negatively impact the financial stability of the company, including the business owner.

There are no limits to the number of life insurance policies a business can own. It’s a good idea to purchase key person policies on anyone who provides significant value to the company. The more policies a business owns, the greater their cash flow and potential tax benefits.

WHAT HAPPENS WHEN AN EMPLOYEE/PARTNER LEAVES?

If an insured individual leaves the company, either for another job or retirement, business owners have a few options for what to do with the policy:

The business can transfer ownership of the policy to the individual
The business can change the insured individual on the policy to a new employee
The business can surrender the policy and receive the cash value payout, minus taxes on interest
The business can retain ownership of the policy and offer the employee a cash value payment and/or death benefit option

If policy ownership is transferred to the individual, that person is responsible for paying any outstanding premiums. The cash value is theirs to use as they wish, and they can change the beneficiary on their policy to anyone they choose.

If the business chooses to change the insured on the policy to a new employee, the cash flow of the policy effectively stays the same, but the company will need to purchase a business exchange rider upfront with the original policy in order to be allowed to change the insured at a later date.

If the business chooses to surrender the policy, they’ll receive the cash value of the policy, minus taxes on earned interest. Funds are the company’s to use as they wish, although they may choose to give the employee the payout as a benefit of employment. This option may replace a typical employer-offered 401(k) match.

If the business chooses to retain ownership of the policy, they may still offer the employee a payout as part of a benefit/compensation package. Some companies choose to name the former employee’s family as the policy beneficiary, so they receive the death benefit when the former employee passes away but the company still retains the policy’s cash value for business cash flow.