Many companies find it advantageous to purchase insurance on lives of shareholders and/or employees.
There are three general purposes:

• funding of buy/sell agreements for the purchase of shares from the deceased shareholder's estate
• collateral security for corporate debts
• providing of funds to indemnify the company against the loss of a key person

Funding the Buy-Sell Agreement

As a source of funds for the obligations under a buy-sell agreement, life insurance is unsurpassed. Since this is the only asset that matures at death, the funds necessary to carry out the terms of agreement will be available exactly when needed. The cost of the insurance is usually far less than the cost of borrowing and, unlike a loan, the insurance proceeds never need to be repaid. The heirs receive cash for the shareholder's portion of the business. The surviving partners or shareholders do not have to impair their cash flow or financial security to finance the purchase.

Creditor Insurance

Creditor insurance is used to insure a business loan. In its most basic form, it involves insuring the life of an individual responsible for the debt or the life of the employee who is most responsible for the success of the business. Creditor insurance helps to ensure that the estate will not be responsible for the amount of the debt and allows the business to continue unencumbered. The advantage to the creditor, if the policy is collaterally assigned to the lender, is the ease of collection upon death of the borrower.

   Life insurance assigned to a lender to cover a loan may receive special tax treatment. A portion of the premium paid may be deducted from the current income while the death proceeds continue to be tax-free to the business. However, certain criteria must be met. An insurance agent in your area can provide details.

Key Person Insurance

Essentially, key person insurance is a policy maintained by a company on the life of an important employee. In the event of his/her death, dollars will be available to partially offset the economic cost of the company of losing and then replacing such an employee. In this case, continued creditor financing will invariably be reviewed and possibly limited or retractor. Life insurance may partially offset some of the financial problems that might arise for the company in such a situation.

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