How Companies Purchase Life Insurance Policies
Life insurance plans are often touted as family financial tools, but they can also be corporate ones as well. Let's take a look at how companies purchase life insurance policies to cover their risk.
You must create security for your wife and child. This is usually the pitch you see with life insurance. The idea is to create a pool of cash upon your passing that will allow you family to maintain their standard of living, put kids through school and basically pay for life events. The core idea of security, however, is something that applies beyond the family situation.
Many people are surprised to learn that companies purchase life insurance policies. In truth, this happens all the time. Why? Well, there are a couple of reasons. The first is to create a pool of money to handle the loss of an owner. Let's say you and I start a business. We are both married. I die. Under estate law, my wife will own my part of the business. You probably don't want that. Most businesses avoid this problem by having the owners enter into buy-sell agreements. Under these, life insurance is purchased on each owner by the company. If they pass away, the money from the policy is used to buy out the spouse.
The second time companies buy life insurance policies is for important employees. They don't buy the policy on the employee, but as a benefit for them. They use the policy as a perk. Why do this? Well, they are trying to keep a key person in their company from leaving for a competitor. Most owners do not want to give up any ownership, so providing perks like this works out very well.
So, how do companies actually purchase these policies? It is pretty simple. They just buy them through an agent. That being said, the actual ownership of the policy is something that has to be thought through very carefully. Why? Taxes! Companies have to be very careful that they do not buy a policy on a owner or employee that the IRS considers to be a taxable benefit. If this happens, the employer or owner will get a notice from the IRS demanding income tax be paid! Ouch!
Companies buy life insurance policies all the time. How they do it is entirely dependent on what they are trying to achieve and tax issues.