Business Life Insurance – Four Small And Costly Mistakes

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An old Proverb says, “Four things on earth are small, but they are exceedingly wise…”, suggesting that size and importance are not always found in proportion.

In that vein, poor attention to small details can lead to big tax consequences when placing life coverage in the business marketplace.

Consider these four small mistakes that can be exceedingly problematic down the road:
  1. Securing investors with a collateral assignment – Assigning a portion of the death benefit for anything other than to secure a loan (not an equity stake!) is a transfer-for-value which will expose those proceeds to income taxation.
  2. Naming a third-party beneficiary – Employers often designate an insured key person’s spouse on company-owned coverage as a fringe benefit. Under this “unholy triangle” arrangement, the IRS will treat the payment to the spouse as taxable income, and it is unlikely the business will get a deduction.
  3. Securing company recovery in an executive bonus plan – Employers often hold a collateral assignment on an executive bonus plan policy to get premiums back if the insured leaves too early. At best the arrangement could be deemed a mismanaged and undocumented split dollar plan. At worst, the reimbursement could be taxable income to the employer.
  4. Overlooking an insured key person’s Notice & Consent – Company-owned employee-coverage must be placed with the knowledgeable approval of the insured. Otherwise, the bulk of death benefit could be subject to taxation.

In each case, the desired result is reasonable and even advisable. The good news is that we can suggest alternative arrangements that reach the risk management goal without adverse tax effects. Call for assistance with all your businesses cases. Contact Tom Virkler, JD, Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.

For What’s It’s Worth: Perhaps the biggest little mistake in the printing business was when the word “not” was omitted from the 7th Commandment in the 1631 edition of the King James Bible, leaving it to read, “Thou shalt commit adultery.” Royal printers Robert Barker and Martin Lucas were fined £300, $400,000-$600,000 in comparable worth today.