Life Insurance in Business - Part 3: Corporate Life Insurance Strategies

Part 3: Corporate Life Insurance Strategies

Corporations, just as sole proprietorships and partnerships, use life insurance to protect their financial interests. This article will examine a number of protection strategies that are employed by corporations to shield them against the loss of important company personnel.

Key person life insurance protects a corporation from the financial loss incurred when a key employee -- a major owner, for example -- dies. (A key person can also be a sales manager, a vice president, a CEO, etc.) Due to the loss of a key person, a corporation could also find itself subject to losses of jobs, customers, and even an impaired credit standing. To offset this financial impact, the company may purchase an insurance policy on the life of the key person. Some contracts include a 'change of insured' provision that allows the employer to change the person who's life is insured when there's a change of personnel, without the need to cancel the existing policy and issue a new one. The corporation owns, pays the premiums for, and is the beneficiary of the policy. The policy's face amount is generally commensurate with the amount of lost corporate income plus the costs of hiring and training a replacement for the deceased key person.

A Section 303 stock redemption permits a corporation to partially redeem a shareholder's stock for the purpose of providing cash to cover estate settlement costs. Tax laws generally require that stock redemptions be total and complete in order to avoid taxing the proceeds payable to the surviving family as dividends. The Internal Revenue Service, however, does allow partial redemptions to pay funeral expenses, taxes and other estate-related costs.

Deferred compensation is an executive benefit that enables a highly paid corporate employee to defer the receipt of current income -- such as an executive bonus