Can a partnership use a partner's family term life insurance policy as a business expense, with the intention of using the policy as a way to buy out the spouse's interest in the business?
We are setting up key man policies, and one of the spouses asked whether the business could pay for the family's term life insurance policy as a benefit from the business.Life insurance policies can be an excellent way to protect your interest in the company in the event of the death of one of the partners. Usually, a company will take out the policy on the life of its owners so that, upon death, the funds are available to pay the family for the owner's share of the business. However, there are a number of options to consider.
There's the nature of the policy (term life or permanent life?). There's the owner of the policy (the business? Or a cross-purchase by partners?). There's the amount of the policy (is it sufficient to pay the value of the partner's share of the business?). There are tax issues, depending on how the payment of premiums is arranged.
The business owners should speak with their insurance, accounting and legal advisors to make sure that the policy they choose best suits their needs.
Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.