Would this be Considered a Legal Insurable Interest?

Q. Hello,

100% shareholder President and CEO of an S Corp. wanted to purchase individually as owner and beneficiary a life insurance policy on the life of a vice –president and COO of his company.

The vice-president and COO wanted to purchase individually as owner and beneficiary a life insurance policy on the life of the President and CEO of the company.

Making each the beneficiary in the event of the others death.

Both individuals knew that with the death of the other the company could not continue forcing a sale.

Each desired to provide for the other through the sale process.

Would this be considered a legal insurable interest?

Thank you

A. Many buy-sell agreements are funded by life insurance policies that are placed on the lives of a company’s shareholders, partners, and / or key individuals. Life insurance can provide an ideal funding solution – however, how it is owned can make a difference.

For example, the proceeds of a policy that is owned by the company will actually flow back to the company itself upon the death of an insured. Therefore, the proceeds will be considered a corporate asset.

If, however, the policy is owned by the individuals, the premiums that are paid for the policies are not tax deductible because the payers of the premiums are the direct beneficiaries of the life insurance policies. In addition, in most cases, the proceeds from the policies will be received income tax free.

In many buy-sell agreements, it can be difficult to arrange for the proper amount of life insurance, as well as a premium cost that will treat all of the participants in the transaction equally. In this particular situation, the two participants have vastly different ownership percentages (such as 100 percent versus 0 percent).

Yet, while this situation may present an inequity in insurance funding, there would still be an insurable interest, as both parties have an interest in seeing the business continue upon the loss of the other. In addition, upon the loss of either individual, the business is likely to lose much of its value – as both are extremely important to the overall success of the company.

Because of this, both would have a legal insurable interest in each other. The COO would have an insurable interest in the CEO, as his employment would surely be at stake if the CEO passed away, causing the potential demise of the business. Likewise, the CEO would also have an insurable interest in the COO, as the COO’s death could also cause a downfall of the company upon his passing and in turn, cause financial hardship to the CEO.

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Susan Wright holds a BA from Michigan State University and an MBA from St. Louis University. Having over 20 years of working experience in the insurance and financial services industry, she has trained more than 10,000 financial services representatives. Susan has had licenses in real estate, insurance, and NASD Securities, and she has earned nine industry professional designations, including CLU, ChFC, RHU, REBC, CSA, CLTC, CCFC, CSS, and ADPA. Read more about her on Google+

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