Advanced Underwriting Consultants

Question of the Day – June 2

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who is an owner in multiple business entities.  The client has need of insurance on his life to cover business debt, key person needs and buy-sell funding.  How should the insurance policy be owned, and who should be the beneficiary?

Answer: With so few specific facts, it’s hard to give advice that will definitely fit the situation the producer is facing.  It is possible to make a few general comments though.

First, if life insurance is used to help secure debt payoff in the event of death, the insurance proceeds should be paid to the entity that owes the debt.  For example, if the debt is owed by the business, the business should probably be the owner and beneficiary of the life policy.

Second, life insurance death proceeds that will definitely be needed for business needs in the event of the death of the key person should likewise be paid to the business.  If the business is the beneficiary of the policy, it should likewise also be the policyowner—to structure otherwise might lead to an undesired tax result.

Finally, deciding on proper buy-sell funding structure depends on what the buy-sell agreement itself says.  It is possible to draft the buy-sell agreement under a redemption or entity purchase arrangement.  Under such an arrangement, the life insurance would likely be owned by the business entity—and the entity would also be the beneficiary.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.