Your company owns a $2 million life insurance policy on your co-founder.

That is business-owned life insurance, and the policy is only one part of the system the company needs.

The business pays the premiums. The company is the beneficiary. You bought the policy to provide cash if your co-founder dies, so the team can keep getting paid, clients can be retained, and the business has time to recover.

You handled the insurance.

Then your CPA asks three questions:

Where is the employee’s written consent?

Who received the notice before the policy was issued?

Has the company been filing Form 8925 with its tax return each year?

No one knows.

Business-owned life insurance can be an excellent continuity tool. It can also fail at the exact moment the company needs it if the policy, agreements, tax requirements, and intended use were never coordinated.

The issue is not whether you bought life insurance.

It is whether the business completed the legal and tax work around it.

What Business-Owned Life Insurance Actually Means

Business-owned life insurance is not simply any policy connected to a business owner.

For federal tax purposes, an employer-owned life insurance contract generally involves a person engaged in a trade or business owning a policy on someone who is an employee when the contract is issued, with the business or a related person benefiting from the proceeds.

That can include coverage on an officer, director, founder who is also an employee, or another key person.

The job of the policy matters.

Is the company meant to receive money after losing a rainmaker who generates $1.4 million in annual revenue?

Is the policy funding a $900,000 obligation under a buy-sell agreement?

Is the money supposed to repay a lender, recruit a replacement, protect payroll, purchase an ownership interest, or reach the insured person’s family?

One policy cannot be assumed to perform every job merely because the death benefit looks large.

Imagine a company with a $2 million policy. The owners expect $900,000 to fund a buyout, $600,000 to replace lost revenue, $300,000 to recruit a successor, and $400,000 to protect payroll and debt service.

That is $2.2 million of intended work assigned to a $2 million benefit before timing, taxes, or expenses enter the picture.

The bottom line: A policy amount is not a continuity plan until every dollar has a named job.

The Notice and Consent Work Happens Before the Policy Is Issued

This is the requirement business owners are most likely to discover too late.

Under Internal Revenue Code Section 101(j), written notice and consent generally need to be handled before an employer-owned policy is issued. But notice and consent are only the first gate to the intended income-tax treatment.

The notice should tell the employee that the business intends to insure the employee’s life and disclose the maximum face amount for which the employee could be insured when the contract is issued.

The employee generally must provide written consent to being insured and acknowledge that the coverage may continue after employment ends. The employee must also be told that the policyholder will be a beneficiary of proceeds payable after the employee’s death.

The timing matters.

This is not paperwork you want someone trying to recreate after the insured person dies.

The federal exception must also fit the insured person or the use of the proceeds. One status-based route applies when the insured was an employee at some point during the 12 months before death. Another applies when the insured was a director, highly compensated employee, or highly compensated individual when the contract was issued. Separate rules can apply when proceeds are paid to certain family members, trusts, or estates, or are used to purchase an ownership interest from them.

Suppose your company applies for a $3 million policy on an ordinary employee who is not a director or highly compensated employee when the contract is issued. The employee signs valid notice and consent, leaves two years later, and dies eight years after that. Because the person was not an employee during the 12 months before death and did not meet the status test at issuance, valid consent alone does not satisfy that status-based exception. The business and its advisors would need to determine whether another exception applies and how the proceeds are used.

The business may have paid premiums for a decade while assuming the death benefit would receive the treatment everyone expected. Missing consent creates one problem. Failing the exception requirements creates another.

Exceptions and corrective rules can apply, and the result depends on the facts. That is precisely why the legal, insurance, and tax advisors need to review the process before issuance, not after a claim.

The bottom line: Timely notice and consent are essential, but they do not replace the separate tests governing the insured person’s status or the use of the proceeds.

Form 8925 Is Not a One-Time Filing

Internal Revenue Code Section 6039I requires reporting for applicable policyholders that own employer-owned life insurance contracts issued after August 17, 2006. The IRS uses Form 8925 for that reporting.

The form reports the total number of employees at year end, the number covered by employer-owned life insurance, the total amount of that insurance in force at year end, whether valid consent was received, and the number of insured employees without valid consent.

Generally, a policyholder owning one or more covered contracts attaches Form 8925 to its income-tax return for each year the contracts remain in force.

That means the work does not end when the policy is purchased.

Someone needs to know that the policy exists, where the notice and consent records are stored, who is insured, what the face amount is, and whether the annual reporting is being completed.

Now imagine the company changes accounting firms.

The insurance file remains with the broker. The consent sits in an old HR folder. The new tax preparer receives last year’s return without the supporting policy records. Nobody on the current leadership team knows Form 8925 should be reviewed.

The policy is still active. The compliance process is not.

The bottom line: A policy that lasts 20 years needs a reporting system that lasts 20 years too.

Ownership and Beneficiary Designations Decide Which Pocket Gets the Money

Business owners often say, “We have life insurance,” as though the existence of the policy answers the planning question.

It does not.

Who owns the policy?

Who pays the premium?

Who is insured?

Who is named as beneficiary?

Which agreement tells that beneficiary what the money is meant to do?

Those answers determine which pocket receives the proceeds and whether the money is legally obligated to solve the problem you had in mind.

If the company owns and receives the policy, the company controls the money. A family expecting a direct payment may not receive it. If individual owners hold policies on each other, changes in ownership, relationships, or entity structure can create a different set of issues. If a policy is transferred later for money or other value, federal transfer-for-value rules may limit the income-tax exclusion unless an exception applies.

Now add a buy-sell agreement.

The agreement may require a $1.5 million purchase of a deceased owner’s interest while the policy funding it pays only $1 million. Or the policy may pay the company while the agreement obligates an individual owner to make the purchase.

The insurance exists. The money arrives. The wrong pocket still has the cash.

The bottom line: Ownership, beneficiary designations, and agreements must direct the same money toward the same obligation.

LIFT – Legal, Insurance, Financial & Tax® Framework

Business-owned life insurance sits at the intersection of all four systems. Reviewing only the policy leaves three quarters of the plan unseen.

Legal

The legal review identifies the policy owner, beneficiary, insured person, required notice and consent, buy-sell obligations, employment terms, and the authority someone needs to act after a death. It also checks whether the agreements still match the current entity and ownership structure.

Insurance

The insurance review asks what risk the policy is transferring, whether the type and amount still fit the job, whether premiums are being paid, and whether the business has changed since underwriting. A policy designed when revenue was $800,000 may not solve the same problem after revenue reaches $3.2 million.

Financial

The financial review gives every dollar a job. It measures payroll, debt service, recruiting costs, lost revenue, business value, family needs, and the time the company would need to stabilize. It also tests whether the policy overlaps with reserves, credit, or other coverage.

Tax

The tax review addresses the expected treatment of proceeds, employer-owned policy rules, Form 8925 reporting, ownership changes, and any transfer-for-value concern. It confirms what must be documented before issuance and what must continue each year.

The bottom line: LIFT turns a policy into a coordinated business system.

Your TEAM Is Already Invested in This Policy

You have spent Time, Energy, Attention, and Money building the company the policy is meant to protect.

The premiums are only the most visible cost.

Your team has spent time applying for coverage, completing medical underwriting, gathering financial records, and answering questions. Leadership has spent attention deciding who should be insured. The company has committed money to premiums that may continue for years.

But the business may never have assigned an owner to the system around the policy.

Who confirms the consent before issuance?

Who sends the policy information to the tax preparer?

Who reviews the amount after revenue or valuation changes?

Who updates the buy-sell funding when ownership changes?

Who makes sure the family, co-owners, and leadership team understand what the proceeds are supposed to do?

Without ownership of those tasks, the company can spend 15 years paying for coverage and still discover that the surrounding plan is incomplete.

The bottom line: Protect the TEAM already invested by assigning responsibility for the policy’s legal, insurance, financial, and tax life cycle.

LIFTed Business Advisor: Holding the Business and Family Picture

This is the gap I help founders close before a death forces every question into the same week.

I do not replace your insurance professional, CPA, valuation expert, or financial advisor. I help hold the connected picture so the policy, agreements, tax reporting, company cash needs, ownership plan, and family expectations point toward the same outcome.

The relationship matters in the moment too.

When an owner or key employee dies, the family and team should not have to guess who owns the policy, where the consent is stored, which agreement controls, or why the company received the proceeds. Because you have an ongoing LIFTed Business Advisor relationship, someone already knows what the policy was meant to do and can help the advisor team act from the same plan.

The bottom line: Business continuity depends on someone holding the policy, company, owners, family, and advisor team in one picture.

LIFT Business Breakthrough™ Session: What You Can Do Right Now

Pull the declaration page or current statement for every policy the business owns.

For each one, identify the owner, insured person, beneficiary, face amount, issue date, premium payer, and intended job. Then locate the written notice and consent and confirm with your tax advisor whether Form 8925 has been addressed for each applicable year.

Do not transfer a policy, change ownership, or change a beneficiary based on a checklist alone. Those changes can affect agreements, taxes, control, and who ultimately receives the money.

As your LIFTed Business Advisor, I review the policy through the LIFT – Legal, Insurance, Financial & Tax framework, coordinate with your insurance and tax professionals, and help you identify which pieces need attention before the coverage is needed.

Schedule a complimentary 15-minute discovery call and let’s find out whether your business-owned life insurance is connected to the plan you think it is: Access the link here

This article is a service of Ganvir Law, a Personal Family Lawyer® Firm and LIFTed Business Advisor. I offer a complete spectrum of legal services for businesses and can help you make wise choices for your business throughout life and in the event of your death. I also offer a LIFT Business Breakthrough Session, which includes a review of the legal, insurance, financial, and tax systems supporting your business. Call our office today to schedule.

The content is sourced from Personal Family Lawyer for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

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