There are a number of reasons why a company might purchase a life insurance policy on a key employee and/or shareholder. These reasons include:
- Providing a tax-free death benefit that can be used to:
- Pay a signing bonus should the deceased's replacement be hired away from another company;
- Help pay the salary of the new key person;
- Assure lenders of continued financial soundness in the event of the key employee's death;
- Offer some financial indemnity against the impact on profits given the death of the key person;
- Funding a Buy and Sell Agreement between Shareholders;
- Purchasing the company’s shares at death if permitted under the company's bylaws;
- Funding a Capital Dividend Account (CDA) to assist remaining shareholder(s) to purchase the shares from the deceased shareholder’s estate;
- Providing Collateral Security for bank loans or lines of credit. Note, this is the only circumstance under which a company can claim the life premium as an expense (i.e. the policy is required by a formal lender);
- Funding Preferred Compensation Plans, Supplemental Pension Funding as in a formal Retirement Compensation Agreement (RCA) or Retiring Allowances;
There are a number of ways in which a corporation may pay the premium on a key person life insurance policy and have the death proceeds paid to the Life Insured’s family or estate.
This should only be done after detailed discussions between the company,
its lawyers and the key person have occurred in order for everyone to have a clear understanding
of what is involved.
