Corporate-Owned Life Insurance

When we think of life insurance, we often associate it with providing income replacement or covering tax liabilities. However, for high net-worth individuals, life insurance can serve as a powerful tool to accumulate passive wealth within a company, access that wealth tax-free, and transfer it to beneficiaries without incurring taxes.

The Challenge:

In many businesses, surplus cash or retained profits are invested in taxable options. This is especially true when business owners have a higher marginal tax rate than their businesses and don’t require extra income. While this strategy defers taxes, eventually, these assets will be subject to high dividend tax rates when they are withdrawn from the corporation. This creates a tax burden that needs to be addressed.

The Solution:

One solution to this problem is investing a portion of the retained profits in tax-exempt permanent life insurance. This approach offers two main benefits:

• Tax-Free Growth: The savings component of the life insurance policy can grow on a tax-free basis, allowing your wealth to accumulate more efficiently.

• Tax-Free Capital Dividends: Upon death, a significant portion, if not all, of the policy proceeds can be paid to the shareholder’s estate as a tax-free capital dividend. This ensures that the wealth accumulated within the policy can be transferred to beneficiaries without incurring taxes.

  Additional Tax Advantages of Corporate-Owned Life Insurance:

• Corporate-owned life insurance provides further tax advantages. The premiums are paid with corporate after-tax dollars, which are taxed at a lower rate compared to an individual shareholder’s personal tax rate. This allows for more efficient use of corporate funds. Additionally, the value of the life insurance policy at death is typically lower than the policy’s payout, resulting in lower tax liability for shares of a private corporation.

Considering Other Factors:
Some business owners may be hesitant to tie up corporate funds in an illiquid investment like a life insurance policy. However, there is a solution to this concern. By using debt with the life insurance policy as collateral, it is possible to acquire life insurance while preserving cash flow. You can click this link to read more about this wealth-building strategy.

At CRM Financial, we understand the unique needs of high-net-worth individuals and the importance of maximizing wealth while minimizing tax liabilities. Our team of experts can guide you through the intricacies of corporate-owned life insurance and help you implement a strategy that aligns with your financial goals.

Contact us today to learn more about how corporate-owned life insurance can benefit you and your business. Let’s work together to secure your financial future and protect your wealth for generations to come.