Updated: Oct 15, 2020
Please note: I am NOT an accountant, CPA, or attorney. Please seek the advice of a qualified professional for accounting, tax, or legal advice and services. And, as always, if there's something not correct in my writing, please let me know - with cited information - and I'm happy to learn and amend this article.
When purchasing life insurance for personal planning, the equation to determine the maximum amount you can apply for, is often very simple:
Current Income x maximum allowed age multiplier. See the example table below.
If you're 45 years old, take your income and multiply by 20 for the maximum amount of coverage for underwriting.
Earned income is also very easy to verify through pay-stubs as well as annual tax filing returns. It's the same principle as underwriting for a mortgage.
However, for businesses, it gets more complex. Business revenue is not necessarily dependent upon the work of ONE person. If you have 20 employees, all 20 play a role in the revenues and ultimate profitability of the company.
There are various ways and purposes you can use your business checkbook to purchase life insurance:
Key Person Coverage (including the owner): This coverage helps to cover the loss of a key person for a period of time until a person with their unique abilities can be hired and trained. The business entity is the owner of the policy, pays the premiums (not tax-deductible), and is the beneficiary of tax-free proceeds.
Executive Bonus Plan (including owner): This is a plan that *may* use tax-bracket planning to pay additional compensation + the taxes on that compensation to a selected executive (including the owner) for the purposes of buying life insurance. The executive is the owner of the policy, pays the premiums (from the additional compensation), and selects their own beneficiary of the policy. Note: If the business entity is a "pass-through" entity, then there is no "tax bracket planning" being done. The capital is simply being transferred from the business entity to the business owner or managing-member (LLC).
There are other plans that are primarily designed for non-owner key executive benefit planning.
Some common requirements for all the above:
Legal documentation to create various agreements between business and plan participant (including owner),
Amendments to corporate meeting minutes,
Annual disclosure compliance requirements for each of the above plans.
These documents would not only need to be done between the business and any covered employees, but also submitted to the insurance company for review and legal plan compliance.
I'd keep it as simple as possible:
The simplest way to have the maximum benefits of cash value life insurance, is to own and fund it with personal funds by writing a personal check, not the business checkbook. Obtain personal coverage based on your personal reported income as reported annually to the Internal Revenue Service (IRS).
This way, the only requirements may be a verification of income, and you can avoid many of the hassles of the legal work for doing your own planning. A Personally Owned Policy Gives Great Flexibility!!!
Imagine this: If your business took out a loan - from ANY source - isn't the interest cost still deductible as a cost of doing business? As long as the purpose was to produce a profit - and you can substantiate it to the IRS, that's true! Does the source of the loan funds matter? No!
Some Questions To Ponder:
Would you agree that to secure a larger line of credit, you'd have to have an eligible, larger, 'pledged asset' for collateral for that line of credit?
Could your business take a loan out against your personally owned life insurance cash values - just like Walt Disney, J.C. Penney, and Pampered Chef? Yes.
Could your business pay the loan interest every year that they are charged for that loan? Yes.
Isn't that interest still tax-deductible for your business? Yes.
Aren't those payments, when applied back to the policy loan help restore its collateral capacity for future borrowing? Yes. (Make sure you notate that it's for loan repayment and not paying premiums for your record keeping purposes.)
Does your business HAVE to make interest payments every month or every year like a traditional bank loan? NO!
What would happen with the bank loan if you couldn't make your payments? The bank will take, own, and sell your collateralized property if you don't make your payments. YouTube: Slaves to Debt: The Essence of the Banking Industry (Clip from "The International" 2009)
Even if your business does NOT make those payments, isn't the interest charged still tax-deductible for your business as an incurred liability for doing business? YES!
And won't your personal life insurance policy still have the growth each year that is off the radar of the IRS to help offset that policy loan interest charge? Yes!
Does that flexibility for loan repayments exist much of anywhere else? Not that I can think of!
And if something happened to you, the business owner, where you became sick or hurt and couldn't work... wouldn't the policy continue to be funded after a waiting period under the disability waiver of premium? Wouldn't that just buy time for your business as well as fund flexibility for the business for the loan payments?
Is there any reason why you're NOT doing this?
Do you believe that we are overdue for a recession?
What commonly happens to lending during a recession? Don't lenders not lend as much during a recession?
If lenders don't lend as much, doesn't that mean that there would be an increased need for capital for those who don't have it?
If there's a recession, wouldn't the person who has access to capital and credit be able to weather the storm far better than the person who does not?
What if you could have your own line of credit that you could access GUARANTEED - without requiring a bank's credit approval - so you could take advantage of the bad things that would happen during a recession?
Would you rather get started before or after the next downturn?