Understanding Entity Purchase Plans: Key Facts for Life Insurance Investors

What Is an Entity Purchase Plan?

An entity purchase plan allows a business entity—such as a corporation, partnership, or limited liability company—to purchase a life insurance policy on a key employee, founder, or officer. The entity becomes the policy owner, the insured is the key individual, and the entity typically pays the premiums.

When Is It Appropriate?

These plans are most common in:

• Succession planning for small businesses where a single owner's death could jeopardize operations.
• Key person insurance to cover the loss of a critical employee whose absence would severely impact revenue.
• Funding buy‑out provisions in partnership agreements, allowing the remaining partners to purchase the deceased partner's share.

Tax Implications

Because the entity owns the policy, the premiums are usually not deductible as a business expense. However, the death benefit is paid out tax‑free to the entity, which can then use the proceeds to fund buy‑out or succession needs. The policy's cash value grows on a tax‑deferred basis, but withdrawals are taxable to the entity.

Key Differences from Personal Purchase Plans

Ownership

Personal plans are owned by the individual; entity plans are owned by the business.

Premium Payments

In personal plans, the insured typically pays; in entity plans, the business pays.

Beneficiary Designation

Entity plans usually name the business as the beneficiary, whereas personal plans name individuals.

Use of Proceeds

Entity plans are structured to provide funds for business continuity, buy‑outs, or succession, not for personal wealth building.

Common Misconceptions

• "The premiums are deductible." – Not generally true because the entity is the owner.
• "The death benefit goes to the insured's heirs." – It goes to the business, unless a sub‑beneficiary is named.
• "Any business can set up an entity purchase plan." – The business must be a legal entity with sufficient cash flow to cover premiums.

How to Set One Up

1. Identify the key individual and the amount needed to cover potential loss.

2. Choose a reputable insurer that offers entity purchase plans.

3. Draft a policy ownership agreement outlining premium payments, beneficiary designations, and cash value withdrawal terms.

4. File necessary state and tax documents to comply with corporate governance and IRS regulations.

Typical Costs and Cash Flow Considerations

Premiums for entity purchase plans are often higher than personal plans because of the larger death benefit and the business's risk profile. Businesses should model cash flow to ensure sustainable premium payments.

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