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Quick Tips for Creating Insurance Plans for Business Owners

Posted by Vive on 6 Oct 2015

Insurance Plan Designs for Business Owners - What to Consider

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1)  Key Person Plan

  • Determine the amount of insurance from the application. Is this a reasonable amount based on financial underwriting guidelines of the carrier?  Typically this is 5-10 times the earned income of the key person.
  • The business entity (Inc. or LLC) is the applicant, owner, and beneficiary of the policy for the purpose of protecting the short term profits of the company if the key person should die prematurely.
  • A company officer with signing authority will sign the application on behalf of the company
  • The premium is a non-deductible expense to the company.
  • The death benefit paid to the company is income tax-free as long as written “notice and consent” has been executed by the insured.
  • The policy is usually term insurance to cover to retirement.

2)  Cross Purchase Buy Sell Plan (2 owners)

  • Determine the amount of insurance from the application. Is this a reasonable amount based on the fair market value of the business based on the company financial statement (i.e. balance sheet and income statement-P&L)?
  • Each co-shareholder will be an applicant, owner, and beneficiary of a policy on the life of the other co-shareholder.
  • The co-shareholders will execute a Cross Purchase Buy Sell Agreement drafted by their attorney.
  • The premium may be paid by the company as a current tax deductible Section 162 bonus.  This bonus amount is taxable income to each policy owner.
  • The death benefit paid to the surviving owner is income tax-free.  The surviving owner will use this cash to buy the shares from the estate of the deceased owner according to the terms of the Cross Purchase Buy Sell Agreement.
  • The policy is usually term insurance, but permanent insurance is used in some cases if business owners plan on holding their shares all the way until death

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3)  Stock Redemption (Entity) Buy Sell Plan (2 or more owners)

  • Determine the amount of insurance from the application.  Is this a reasonable amount based on the fair market value of the business based on company financial statement (i.e. balance sheet and income statement- P&L)?
  • The business entity (Inc. or LLC) is the applicant, owner, and beneficiary of the policy on the life of each shareholder.  A company officer with signing authority will sign the app on behalf of the company
  • The shareholders and the company will execute a Stock Redemption Buy Sell Agreement drafted by their attorney.
  • The premium is a non-deductible expense to the company. 
  • The death benefit to the company is income tax-free as long as a written “notice of consent” has been executed by the insured.  The company will use this cash to buy the shares from the estate of the deceased owner according to the terms of the Stock Redemption Buy Sell Agreement.
  • The policy is usually term insurance, but permanent insurance is used in some cases if business owners plan on holding their shares all the way until death.

4)  Business Insurance to Offset a Business Debt (Verify if Business or Personal Debt)

  • Determine the amount of insurance from the application.  The amount will usually be equal to the principal amount of a loan the business has taken from a bank.
  • The business entity (Inc. or LLC) is the applicant, owner, and beneficiary of the policy on the life of the majority shareholder.  A company officer with signing authority will sign the app on behalf of the company.
  • The premium is a non-deductible expense of the company.
  • A collateral assignment form is filed with the carrier in favor of the collateral assignee (bank) … “as its interest may appear”. (Must be completed outside Vive)
  • Upon death of the insured while the collateral assignment is still in effect, the carrier will send 2 tax-free death claim checks.  Check #1 paid to the bank “as its interest may appear” with the remainder of the death proceeds, if any, in Check #2 to the company as primary beneficiary.
  • The policy is usually term insurance.

Using Vive Term Life Insurance Software for Business Cases

Did you know Vive can also be a great way to submit your term cases for business owners? BSMG is here to support you with all of your business cases, the above are just a few areas in which we can help.

Contact the Vive team to learn more or log-in to Vive today for instant quotes and comparisons for the plans mentioned above.

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Topics: Insurance for Small Business Owners, Term Life Insurance