Four strategies to leverage life insurance as a business owner

Under a key person life insurance policy, the business owns the policy and pays the associated premiums. In this case, the business is also named as the beneficiary and receives the benefits upon the death of the key person. That money can be used to help the business replace lost revenue or other expenses as they search for a replacement.

In the case of some higher compensated individuals, a 401(k) or qualified employer-sponsored retirement plan may not meet their needs due to contribution limits. In this case, the business purchases life insurance policies on each key employee, and the employee defers money into the plan. The employer may also choose to make additional contributions to the account.

This approach provides for life insurance protection that provides the key employee with the ability to protect those they love if they pass away. It can also be used as a part of the employee’s supplemental retirement income strategy. Under the terms of a written agreement, the employee applies for and owns a life insurance policy on his/her own life. The employer pays the annual premium and receives an immediate income tax deduction for the bonused premiums. The employee recognizes the premium, and the bonused premiums are included on his/her W-2 at year-end. 

With a buy–sell agreement that is funded by life insurance, the company or the individual co-owners buy life insurance policies on the lives of each co-owner. Thus, if an individual died, the company or the co-owners would receive the death benefits from the insurance policies on your life.