Corporate vs. Personal Ownership of Life Insurance
A life insurance policy can be owned personally or by a company. The person to be insured can be the owner of his/her policy, or a company he or she controls can be the owner.
If the owner of the policy is someone other than the life insured, the insurance company will require that the owner have an “insurable interest” in the life of the person to be insured. This means that a person cannot own a policy on someone to whom they have no relation with, or would not suffer an economic or personal loss due to their passing. For example, a husband or wife may own a policy on their spouse or children, or a company can own a policy on a shareholder or key employee.
Personal ownership is when an individual is the owner of a policy. That individual may be the insured, a parent or grandparent that owns a policy on their child or grandchild, a husband or wife that owns a policy on their spouse, a partner that owns a policy on another partner, and so on.
Corporate ownership is when a company owns the life insurance policy. For example, a company may own a policy on a key employee or on one of its shareholders or even a future shareholder. Corporate ownership of policies can be very important tool in estate planning for the business owners.
Where an individual is a shareholder in a company, the question often arises as to whether it is better to own the policy personally or in the company. The answer to this question depends on the the client’s fact situation, including what the purpose is for the insurance. The major reasons that factor into the personal vs. corporate ownership decision include:
- Personal: The policy may be owned personally to meet personal estate planning needs. These needs include providing a pool of capital to one’s family to offset the loss of income when a parent passes away. It may also be owned personally to fund estate taxes, or provide for enhanced intergenerational wealth transfer.
- Corporate: The policy may be owned by a company as part of a shareholder buy-sell arrangement, to provide key-person protection, or to provide security to a bank on a loan. Corporate ownership can also be used in personal estate planning because of the tax advantages and the access to corporate funds to pay the premiums. Finally, corporate ownership may be used where it has significant retained earnings, knowing that on the death of the shareholder, the tax-free death benefit may be withdrawn by way of a Capital Dividend.
It is not advisable to own a policy in a corporation where the the beneficiary is the insured’s estate or his/her spouse. This approach would result in a taxable benefit for the shareholder. As well, if the company is heavily leveraged or subject to other forms or financial or litigation risk, it might be advisable to hold the policy personally or through a holding company.
The following sections provide more information about the benefits involved with personal vs. corporate ownership of life insurance. It is meant to help you understand why you would consider each option, and which one may be right for you:
- Benefits of Personal Ownership
- Benefits of Corporate Ownership