Special Tax Considerations for the Business Use of Insurance
What are special tax considerations for the business use of insurance?
Businesses use insurance for a variety of purposes: to fund buy-sell agreements, to fund retirement plans, as an employee benefit, to protect against the loss of key personnel, to protect buildings and property from casualty losses and other damage, and to protect against liability exposure. Insurance can be expensive, and financial considerations are certainly important. But if you want to purchase insurance protection for your business, you should become familiar with the tax implications of this coverage as well.
What are the income tax implications of using life insurance to fund a buy-sell agreement?
A buy-sell agreement is a contract used by some business owners to ensure that when one business owner dies, his (or her) business interest will be purchased by another party. (This other party is usually either another business owner or the business itself.) The death of a business owner can have a negative impact on the business as a whole; it can cause a strain for a company owing to the loss of talent, the disruption of the business, and the accompanying loss of revenue. Such an event could also cause the business temporary difficulty in acquiring loans or other funding. The use of life insurance funding in conjunction with the buy-sell agreement ensures that sufficient cash will be available to purchase the deceased owner's share of the business, eliminating the need to find financing at the time of the event. Typically, the insurance coverage is arranged so that your life is insured for an amount equal to the value of your ownership interest in the business. When you die, there should be enough cash from the policy proceeds for the beneficiary of the policy (either the other business owners or the business itself) to pay your estate the price agreed to in the buy-sell agreement for your share of the business.