1, tax-free benefit on the death of the insured (death benefit)
2. growing cash surrender value (cash value), which is exempt from annual taxation
For corporations, the death benefit can be used for business continuation purposes, allowing a company to recover from the financial impact of a key employee’s death (key man). This may take the form of providing capital to attract a skilled replacement, or dealing with the cash flow and going concern issues resulting from a death such as lost sales, difficulty in collecting receivables or the calling of a bank loan. Alternatively, the death benefit can be used for succession purposes by funding the redemption or purchase of the deceased’s shares (buy/sell). An increasing death benefit is useful for buy/sell purposes when shares are increasing in value, and the associated cash value can be used as collateral for corporate or shareholder borrowing
When the corporate perspective is expanded to include the tax issues and estate planning goals of the shareholders, corporate-owned life insurance becomes very attractive for clients wishing to fund capital gains tax triggered by the death of an insured; fund the lifestyle of a surviving spouse; fund a family trust or enhance the after-tax value of an estate. This is because the policy’s cash value grows tax-free, and substantially all the death benefit flows out of the corporation as a tax-free capital dividend, increasing the tax-efficiency and value of life insurance compared with alternative taxable investments within a corporation.