Should My Corporation Own Life Insurance?

Life insurance owned by your corporation is not a tax loophole; it is an application of arithmetic. Premiums paid with corporate dollars taxed at small business rates cost meaningfully less pre-tax income than premiums paid from personally taxed dollars.

At the other end, the death benefit received by the corporation — in excess of the policy's adjusted cost basis — credits the capital dividend account, from which tax-free capital dividends can be paid to the estate or surviving shareholders. Structure is everything; casual arrangements forfeit the advantages.

The clean structure names the corporation as policyholder, premium payer, and beneficiary. Premiums are generally not deductible (a narrow exception exists where a lender requires the policy as loan collateral), but the funding-cost advantage stands on its own. On death, the insurance proceeds minus the policy's adjusted cost basis flow into the capital dividend account, enabling tax-free distributions — often the funding engine of a shareholders' agreement buy-sell.

The classic error is mismatch: the corporation pays premiums on a policy that personally benefits a shareholder, creating an annual taxable shareholder benefit; or a holding company owns the policy while an operating company is beneficiary, distorting the CDA result. Corporate-owned insurance also adds an asset that can complicate the purity tests for the lifetime capital gains exemption — placement within the corporate group deserves as much thought as the coverage itself.