Legal Definitions - corporate-owned life insurance

Corporate-owned life insurance refers to a life insurance policy purchased by a company on the life of an employee, typically a key executive or highly valued individual. In this arrangement, the company pays the premiums for the policy and is named as the beneficiary, meaning it receives the death benefit if the insured employee passes away. Companies utilize corporate-owned life insurance for various strategic business purposes, such as protecting against financial losses due to the death of a critical employee, funding employee benefit plans, or facilitating business succession.

Here are some examples to illustrate how corporate-owned life insurance works:

• Protecting Against Loss of a Key Person: Imagine "InnovateTech," a rapidly growing software company, whose lead engineer, Dr. Anya Sharma, is the sole inventor of their flagship product. To mitigate the significant financial and operational risk if Dr. Sharma were to unexpectedly pass away, InnovateTech purchases a life insurance policy on her life. The company pays all the premiums and is designated as the beneficiary. If Dr. Sharma were to die, the insurance payout would provide InnovateTech with crucial funds to recruit a replacement, manage potential project delays, and maintain investor confidence during a challenging transition period.

  This example demonstrates corporate-owned life insurance because InnovateTech (the corporation) owns the policy, pays the premiums, and receives the death benefit to protect its business interests from the loss of a vital employee.

• Funding Executive Benefit Plans: "Global Manufacturing Inc." offers a non-qualified deferred compensation plan to its top executives, promising them substantial payouts upon retirement. To ensure the company has the necessary funds to meet these future obligations without straining its cash flow, Global Manufacturing Inc. purchases corporate-owned life insurance policies on the lives of these executives. The cash value that accumulates within these policies can be accessed by the company to help fund the deferred compensation payouts. Upon an executive's death, the death benefit further strengthens the company's financial position, which can be used to cover various corporate liabilities, including executive benefits.

  Here, Global Manufacturing Inc. uses corporate-owned life insurance as a financial tool, owning the policies, paying the premiums, and being the beneficiary, to help fund its commitments to its executives.

• Facilitating Business Succession: Consider "Elite Legal Partners," a law firm owned equally by three partners. They have a formal agreement stating that if one partner dies, the firm will buy out the deceased partner's share from their estate. To ensure the firm has the immediate capital to execute this agreement smoothly, without having to sell assets or take on significant debt, Elite Legal Partners purchases a corporate-owned life insurance policy on each partner's life. The firm pays the premiums for all three policies and is the beneficiary. If one partner dies, the firm receives the death benefit, which it then uses to purchase the deceased partner's ownership interest, ensuring the firm's stability and continuity.

  This scenario illustrates corporate-owned life insurance because the law firm (the corporation) owns the policies, pays the premiums, and receives the death benefit to fund a critical business succession plan.