When Your Business Owns a Life Insurance Policy, Proper Set-Up is Key 01.png


Corporate owned insurance can have many benefits. A policy owned by your operating company though, can cause quite a few headaches. When it comes time to sell your operating company, you may find it very difficult to transfer the policy out of the company. In fact, this type of transfer can have onerous tax consequences. And since there is no rollover for life insurance to or from a corporation, the corporation will have a disposition of the policy that could result in taxable income rather than a capital gain.

In the case of non-arm’s length transactions – when the policy is transferred to/from a family or group of companies - the proceeds of disposition are deemed to be the greater of fair market value of consideration received, cash surrender value and adjusted cost basis. If you try to limit the amount of the gain on disposition in the corporation by not receiving fair market value consideration, you could end up with a worse result: a shareholder benefit.

So how do you avoid these types of complications? Careful, advance planning around your corporate-owned insurance is the key.

Ideally, the operating company should avoid owning the policy since transferring life insurance on the sale of the company could prove to be quite difficult. It could also leave the policy exposed to the operating company’s creditors. Ouch!

Instead, a holding company can be incorporated and act as the owner of the life insurance policy while the operating company functions as the beneficiary. When the operating company is sold, retaining ownership of the life insurance policy is simply a matter of designating the holding company as the new beneficiary. This one simple detail, made in advance, can make all the difference when the time comes to sell your business.

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Eric Lidemark, CLU, CFP, CHS profile photo
Eric Lidemark, CLU, CFP, CHS
Certified Financial Planner
Lidemark Financial Group Inc.