Corporate-owned life insurance is a policy held and paid for by a corporation, used to fund buy-sell agreements, protect against key person loss, and create tax-efficient wealth transfer through the Capital Dividend Account.

When the corporation owns the policy and is the beneficiary, the proceeds are received tax-free on the insured’s death. A portion flows into the Capital Dividend Account, from which the corporation can then distribute funds to shareholders as a tax-free capital dividend. For business owners with significant retained earnings inside a corporation, this mechanism allows wealth to transfer to heirs with considerably less tax erosion than a conventional estate distribution.

The planning applications are multiple: funding the buyout obligation in a buy-sell agreement when a co-owner dies, replacing the economic value of a key person whose loss would materially affect earnings, and accumulating cash value inside a permanent policy on a tax-sheltered basis as an alternative to holding passive investments. Each application has specific structuring requirements, and the optimal design depends on the business’s corporate structure, the owner’s estate objectives, and the available cash flow to support premiums.

Corporate-owned life insurance is a tax and estate planning tool as much as it is coverage. See how Wefinx approaches exit planning.

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