For CPAs: five business-owned life insurance questions worth raising early

Why the business purpose comes before the policy

A client may say they want “key-person insurance,” “buy-sell coverage” or a policy for executive benefits. Those descriptions can conceal materially different ownership and tax arrangements. The company might need liquidity to replace a key employee; individual owners might need funds to buy a deceased partner's shares; or the employer might want an arrangement that benefits an executive. The right question is who is economically exposed, who will own the policy and who will receive the benefit.

The CPA's contribution is to identify relevant tax and reporting questions, not to select a carrier, underwrite the insured or solicit insurance without appropriate authority.

The five-question review

1. Whose obligation is being funded? Distinguish operating loss, personal survivor income and equity-purchase liability. They can be different transactions with different policy owners.

2. Is the premium deductible? Do not assume a business expense becomes deductible because an entity writes the check. Federal tax treatment depends on the arrangement, the parties and applicable rules; verify the facts rather than applying a generic sales claim.

3. Is this an employer-owned life insurance contract? Certain employer-owned contracts are subject to Internal Revenue Code section 101(j), including notice-and-consent requirements and possible limitations on favorable death-benefit treatment. Notice and consent generally must be addressed before policy issuance. The situation must be analyzed specifically.

4. Is annual reporting required? IRS Form 8925 reports information about employer-owned life insurance contracts. Determine whether it applies and ensure the relevant records are maintained.

5. Is the arrangement changing? Changes in ownership, entity elections, insured employment, policy loans or beneficiary structure may warrant renewed professional review. A design that made sense at inception can become misaligned.

What the insurance professional can add

With the CPA's questions in view, an appropriately licensed insurance professional can help evaluate whether life insurance can fund the stated exposure and explain product structure, premiums, underwriting and contract limitations. The professional can provide relevant policy information for the CPA's analysis, including ownership, insured, beneficiary, premium schedule and available rider details.

The CPA should retain responsibility for tax interpretation and reporting decisions. Legal counsel handles buy-sell document mechanics, employment agreements and entity documents. The handoff works best when those boundaries are explicit.

Example: a company with a critical operating partner

A privately held company relies on a co-founder to maintain major customer relationships. A proposed company-owned life policy is described as “tax-efficient protection.” That phrase is too imprecise. The coordinated team should first quantify expected revenue or gross-profit disruption, available reserves and the time required to recruit a replacement. Next, determine the proposed policy owner and beneficiary, review insurable interest and employment-consent requirements, then address applicable tax and reporting issues before issue.

The result may be coverage, a smaller amount, a different ownership design or a non-insurance continuity plan. There should be no rush to implementation before the company understands the economics.

A usable introduction script

A CPA can frame the issue this way: “We're reviewing the company’s exposure if a key person or owner dies. I'd like an insurance professional to explain funding options while we review the entity and tax implications.”

With the client's permission, start with the business objective and names of the participating professionals. Exchange sensitive tax returns and owner details only by an appropriately secure method when necessary.