What Is an Entity Purchase for Life Insurance?
An entity purchase, also known as a corporate purchase or business purchase, is a structure where a company—often a holding or investment entity—purchases a life insurance policy on a person's life. The entity becomes the policy owner and beneficiary, and the insured pays the premiums. The policy's death benefit is paid to the entity, which can then allocate the proceeds according to its own rules.
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Why Do Companies Use This Structure?
Companies employ entity purchases for several reasons:
- Tax Efficiency: Premiums are often deductible as a business expense if the policy is tied to a legitimate business purpose.
- Estate Planning: The death benefit can bypass probate and be directed to the entity's owners or shareholders.
- Cash Flow Management: The entity can invest the death benefit in diversified assets, smoothing liquidity for future needs.
Key Legal and Tax Considerations
While attractive, entity purchases involve complex legal and tax rules that vary by jurisdiction. The following table summarizes common factors:
| Attribute | Detail | Context |
|---|---|---|
| Premium Deductibility | Allowed if policy is a bona fide business expense. | Must be documented with a written business plan. |
| Owner's Tax on Death Benefit | Generally excluded from estate taxes if the policy is owned by a qualifying entity. | Subject to federal and state estate tax thresholds. |
| Income Tax on Policy Cash Value | Withdrawals and loans may trigger taxable income. | Requires careful monitoring of policy value. |
Common Types of Entities Used
1. LLC or Corporation: Offers limited liability and flexible ownership structure.
2. Family Limited Partnership (FLP): Facilitates family succession planning.
3. Charitable Remainder Trust (CRT): Combines philanthropy with tax benefits.
Steps to Set Up an Entity Purchase
Risks and Pitfalls
• Compliance Risk: Failure to document a legitimate business purpose can lead to premium expense disallowance.
• Valuation Risk: Overestimating the policy's cash value may result in tax penalties.
• Liquidity Risk: Policy loans or withdrawals can erode the death benefit if not managed prudently.
When Is It Right for You?
Entity purchase is most suitable for:
- High‑net‑worth individuals with substantial business interests.
- Executives seeking to protect family wealth while supporting corporate objectives.
- Charitable foundations looking to grow assets through life insurance.
It is less appropriate for those who lack a clear business use, have limited capital for premiums, or prefer straightforward personal life insurance policies.