momsv1

5.4.2.7 Tax treatment of premiums and benefits
Disability buyou5.4.2.7 Tax treatment of premiums and benefits
5.4.2.7

Tax treatment of premiums and benefits

Disability buyout policies are owned by, paid for by and payable to the prospective buyer

of the business. They insure the life of the current owner or co-owner. Premiums paid are not

Accident and sickness insurance

HAPTER

– Insurance to protect businesses

120

tax-deductible by the policyholder. Nor are they reported as a taxable benefit to the covered life

insured. Benefits received by the policyholder, in the event of disability of the life insured, are

received tax-free.

EXAMPLE (

cont.

)

A year

after

Darrin’s

spouse

(from

the

previous example under

Buy/sell

agreements

)

sold

Darrin’s

shares,

the

remaining

two dentists took in a

“junior partner,” Michael, who purchased 20% of the practice. They now

feel

important

protect

themselves

with

partnership

agreement.

When Lawrence, Daryl and Michael met with their lawyer to have a buy/sell

agreement drawn, the lawyer came up with the following parameters:

Type of agreement:

Cross-purchase

Parties to the agreement:

Lawrence, Daryl and Michael

Lawrence (40%), Daryl (40%) and

Michael (20%)

Business valuation:

$1,200,000, growing at 5% per annum

Payout:

Lump-sum

Triggering date:

months after onset of disability

Definition of disability:

Regular occupation

Once the agreement was drawn up and signed the lawyer sent the three

business owners to meet with a DI specialist, to arrange funding for the

buyout. In keeping with the terms of the buy/sell agreement, the specialist

applied for the issuance of disability policies on the lives of the three owners

with the following characteristics:

Policy No. 1

Insuring Lawrence in the event of disability for $480,000. The policy is owned

66.67% by Daryl and 33.33% by Michael, with premiums to be paid pro rata

by each. In the event of a claim, $320,000 is payable to Daryl and $160,000 to

Michael, for them to meet their obligations under the buy/sell agreement.

Policy No. 2

Insuring Daryl in the event of disability for $480,000. The policy is owned

66.67% by Lawrence and 33.33% by Michael, with premiums to be paid pro rata

by each. In the event of a claim, $320,000 is payable to Lawrence and $160,000

to Michael, for them to meet their obligations under the buy/sell agreement.Disability buyout policies are owned by, paid for by and payable to the prospective buyer
of the business. They insure the life of the current owner or co-owner. Premiums paid are not
Accident and sickness insurance
CHAPTER 5 – Insurance to protect businesses 120

tax-deductible by the policyholder. Nor are they reported as a taxable benefit to the covered life
insured. Benefits received by the policyholder, in the event of disability of the life insured, are
received tax-free.
EXAMPLE (cont.):
A year after Darrin’s spouse (from the previous example under Buy/sell
agreements) sold Darrin’s shares, the remaining two dentists took in a
“junior partner,” Michael, who purchased 20% of the practice. They now
feel it is important to protect themselves with a partnership agreement.
When Lawrence, Daryl and Michael met with their lawyer to have a buy/sell
agreement drawn, the lawyer came up with the following parameters:
§ Type of agreement: Cross-purchase
§ Parties to the agreement: Lawrence, Daryl and Michael
§ Shares: Lawrence (40%), Daryl (40%) and
Michael (20%)
§ Business valuation: $1,200,000, growing at 5% per annum
§ Payout: Lump-sum
§ Triggering date: 12 months after onset of disability
§ Definition of disability: Regular occupation
Once the agreement was drawn up and signed the lawyer sent the three
business owners to meet with a DI specialist, to arrange funding for the
buyout. In keeping with the terms of the buy/sell agreement, the specialist
applied for the issuance of disability policies on the lives of the three owners
with the following characteristics:
Policy No. 1
Insuring Lawrence in the event of disability for $480,000. The policy is owned
66.67% by Daryl and 33.33% by Michael, with premiums to be paid pro rata
by each. In the event of a claim, $320,000 is payable to Daryl and $160,000 to
Michael, for them to meet their obligations under the buy/sell agreement.
Policy No. 2
Insuring Daryl in the event of disability for $480,000. The policy is owned
66.67% by Lawrence and 33.33% by Michael, with premiums to be paid pro rata
by each. In the event of a claim, $320,000 is payable to Lawrence and $160,000
to Michael, for them to meet their obligations under the buy/sell agreement.5.4.2.7

Tax treatment of premiums and benefits

Disability buyout policies are owned by, paid for by and payable to the prospective buyer

of the business. They insure the life of the current owner or co-owner. Premiums paid are not

Accident and sickness insurance

HAPTER

– Insurance to protect businesses

120

tax-deductible by the policyholder. Nor are they reported as a taxable benefit to the covered life

insured. Benefits received by the policyholder, in the event of disability of the life insured, are

received tax-free.

EXAMPLE (

cont.

)

A year

after

Darrin’s

spouse

(from

the

previous example under

Buy/sell

agreements

)

sold

Darrin’s

shares,

the

remaining

two dentists took in a

“junior partner,” Michael, who purchased 20% of the practice. They now

feel

important

protect

themselves

with

partnership

agreement.

When Lawrence, Daryl and Michael met with their lawyer to have a buy/sell

agreement drawn, the lawyer came up with the following parameters:

Type of agreement:

Cross-purchase

Parties to the agreement:

Lawrence, Daryl and Michael

Lawrence (40%), Daryl (40%) and

Michael (20%)

Business valuation:

$1,200,000, growing at 5% per annum

Payout:

Lump-sum

Triggering date:

months after onset of disability

Definition of disability:

Regular occupation

Once the agreement was drawn up and signed the lawyer sent the three

business owners to meet with a DI specialist, to arrange funding for the

buyout. In keeping with the terms of the buy/sell agreement, the specialist

applied for the issuance of disability policies on the lives of the three owners

with the following characteristics:

Policy No. 1

Insuring Lawrence in the event of disability for $480,000. The policy is owned

66.67% by Daryl and 33.33% by Michael, with premiums to be paid pro rata

by each. In the event of a claim, $320,000 is payable to Daryl and $160,000 to

Michael, for them to meet their obligations under the buy/sell agreement.

Policy No. 2

Insuring Daryl in the event of disability for $480,000. The policy is owned

66.67% by Lawrence and 33.33% by Michael, with premiums to be paid pro rata

by each. In the event of a claim, $320,000 is payable to Lawrence and $160,000

to Michael, for them to meet their obligations under the buy/sell agreement.t policies are owned by, paid for by and payable to the prospective buyer
of the business. They insure the life of the current owner or co-owner. Premiums paid are not
Accident and sickness insurance
CHAPTER 5 – Insurance to protect businesses 120