Corporate-owned life insurance, explained.

What it is

With corporate-owned life insurance, the corporation is the owner and beneficiary of the policy, and the corporation pays the premiums. The person insured is usually an owner or a key person. Because the company holds the policy, the proceeds are paid to the company, which changes what you can do with them compared with a personal policy.

Why hold a policy inside the corporation

There are a few common reasons. Premiums are paid with corporate dollars, which for many owners are less expensive than personal after-tax dollars. The coverage can fund a buy-sell agreement, replace a key person, or provide liquidity for taxes that arise on death, particularly where a business or its shares carry a large unrealized gain. And the death benefit can support the next stage of a succession plan without forcing a sale.

The capital dividend account, in plain terms

When a private corporation receives a life insurance death benefit, a portion of it, generally the amount above the policy’s adjusted cost basis, can be credited to what is called the capital dividend account. Money in that account can often be paid out to shareholders as a tax-free capital dividend. This is one of the main reasons corporate-owned life insurance is used in succession and estate planning. The mechanics depend on the policy and your corporate structure, so the exact treatment should always be confirmed with your accountant.

Common uses

• Funding a buy-sell or shareholder agreement with corporate dollars.
• Key person protection, so the company has cash to absorb the loss of someone critical.
• Estate and succession liquidity, so heirs are not forced to sell the business to cover a tax bill.
• A tax-efficient way to hold and eventually distribute accumulated value, when structured with proper advice.

The takeaway

Corporate-owned life insurance is a planning tool, not a product you buy off a shelf. It works best when the ownership structure, the purpose, and the tax treatment are set up deliberately, with your accountant and advisor in the room. This article is general information, not tax advice, and every corporation’s situation is different.

Common questions

What is corporate-owned life insurance?

It is a life insurance policy owned and paid for by a corporation, usually insuring an owner or key person, with the corporation as beneficiary. It is used for continuity, succession, key person protection, and tax-efficient planning.

Why hold life insurance in a corporation instead of personally?

Premiums are paid with corporate dollars, which are often cheaper than personal after-tax dollars, and the death benefit can be used to fund agreements, cover taxes, or be distributed tax-efficiently through the capital dividend account. The right choice depends on your structure and should be confirmed with your accountant.

Is the death benefit tax-free to my company?

A life insurance death benefit received by a private corporation is generally not taxable, and the portion above the policy's adjusted cost basis can often be credited to the capital dividend account and paid out as a tax-free capital dividend. The exact treatment depends on the policy and structure, so confirm it with your accountant.