In the corporate world, the ability to navigate uncertainties effectively can be the difference between growth and stagnation. Businesses may face various risks that could impact their operations, financial health and future growth. One strategic solution that has gained prominence among businesses is corporate-owned life insurance (COLI). This financial tool is not just about risk mitigation; it’s about creating stability and planning for the future.
What is corporate-owned life insurance?
Corporate-owned life insurance is a type of life insurance in which the company itself takes out a policy on the lives of its employees. This form of life insurance is typically used for key executives and crucial personnel within the company. This approach is fundamentally designed to help protect the company against financial losses that may arise from the untimely death of a key member of the organization.
Types of Corporate-Owned Life Insurance
Corporate-owned life insurance can be structured in several ways to meet a business’s specific strategic needs. Below are the four primary types of life insurance that companies may implement to help protect and enhance their operations.
Key Person Insurance
The untimely loss of a top executive or critical team member could severely disrupt business operations and adversely impact revenue streams. Key person life insurance is designed to protect your business against such losses. The policy’s death benefit, which is typically tax-free and available shortly after the key person’s passing, can provide essential capital. This capital may be used to find suitable replacements or restructure as necessary without destabilizing the company’s financial footing.
Buy-Sell Insurance
Partnerships and multi-owner corporations may face unique challenges if one partner dies unexpectedly. To prevent potential conflict and to help ensure business continuity, many organizations implement a buy-sell agreement life insurance policy. This arrangement can allow the business or remaining partners to use the life insurance proceeds to purchase the deceased partner’s shares, thereby maintaining control and avoiding additional complications.
Executive Compensation
Attracting and retaining top talent is paramount for any business aiming to compete at the highest levels. An effective strategy to enhance executive compensation packages may be through COLI-funded deferred compensation plans. These plans not only offer competitive benefits to key executives but also have the potential to provide tax-free growth and distributions.
Guaranteed Issue Life Insurance
For companies with at least ten key employees, guaranteed issue life insurance may be a valuable option. This type of insurance does not require medical underwriting, allowing businesses to procure additional coverage for key individuals with greater ease. It is especially popular in professional services industries where the ability to quickly and efficiently increase coverage may be critical for retaining and protecting top performers and executives.
Interested in corporate-owned life insurance?
Understanding the benefits of corporate-owned life insurance is just the first step. To truly safeguard your business and help ensure its longevity, consider how COLI could be integrated into your broader business strategy. Talk to one of Higginbotham’s life insurance specialists and discover how we can create a COLI solution that’s tailored to your organization’s needs.
