When a business owner contacts us for key life insurance or a policy to fund a buy-sell agreement, we are usually asked about term life, as it is less costly (initially) and fairly simple to implement. However, a key rule of business accounting is if you can’t get a tax deduction, make sure you get a cost recovery.
A business cannot take a tax deduction on premiums paid for business life insurance. However, a business will only get a cost recovery if the insured person (owner or key person) passes away. Because of this, we sometimes recommend a permanent policy to a business (I say “sometimes,” because not all situations are alike).
In some business insurance situations, a permanent policy (whole or universal life) can provide some benefits that term life insurance cannot. First of all, a whole or universal life policy will provide cost recovery at some time, either upon the death of the insured or, in some cases by accessing the cash value of the policy. Additionally, if the business is the owner of the policy, the cash value will show up on the books as an asset.
Another benefit of permanent insurance is that a properly-funded permanent policy can be used as a retirement supplement for the owner or the key employee (as a distribution if the employee leaves or retires. Businesses often offer this benefit as an incentive (golden handcuff), a great method of retaining employees. We advise that you check with your accountant to properly structure this type of arrangement.
If the premiums for a permanent policy don’t fit into the business budget, return of premium term life insurance is another solution we recommend for business insurance. With this type of policy, the business would pay a level premiums at the end of the term, the business would receive all the premiums back. The premiums for these policies are more expensive than regular term policies, but there will be a full cost recovery if the insured person out-lives the policy. Or, as with the cash value of permanent policy, the premium refund can be used as a golden handcuff, providing the key employee with incentive to stay employed.
As with most situations requiring life insurance, there are multiple solutions to look at. If you would like quotes for your business insurance needs, feel free to call us at 866-691-0100 ext. 105 or email us any time.