Course: Insurance Planning
Lesson 17: Business Uses of Life and Disability Insurance
I have a quick question regarding buy/sell agreement; not clear who would pay the premiums on disability and or life insurance on the principals and the key employees?
Great question. A buy-sell agreement relates to owners of the business while a Key Person policy can relate to non-owners as well.
Life Insurance in a Cross-Purchase Buy-Sell Agreement
Let’s begin with a buy-sell agreement funded using life insurance in a cross-purchase arrangement. If we assume three owners, named Able, Bob, and Cain:
- Able purchases and owns individual life insurance policies on Bob’s and Cain’s life.
- Bob purchases and owns individual life insurance policies on Able’s and Cain’s life.
- Cain purchases and owns individual life insurance policies on Able’s and Bob’s life.
- Each shareholder pays the premiums from personal funds on the policies he owns on the lives of the other two shareholders.
- The premiums are non-deductible and the death benefit is income tax free.
Disability buy-out insurance in a Cross-Purchase Buy-Sell Agreement
If disability were also funded as part of the buy-sell agreement, a cross-purchase policy structure would be same as the life insurance example above. The taxation would also be the same, the premiums are non-deductible and the policy benefits would generally be received income-tax free.
Key Person Insurance
This policy would not generally be part of a buy-sell agreement. The business itself would generally own a Key Person Policy. Premiums are paid by the business and are non-deductible. Death benefits are generally income tax-free.
How completely does this address your question?