Old-Case Study: Consulting Company


A COLI Stock Redemption Case Study

​The following summary highlights enhancements made to an existing stock redemption plan sponsored by a consulting firm.  We deployed a Company Owned Life Insurance (COLI) product to increase the yield and tax-efficiency of their existing financial strategy.
Existing Stock Redemption Strategy

  • Consulting firm with 20 equal shareholders
  • Subchapter S-corporation
  • Firm is required to purchase stock of retiring, incapacitated, or deceased shareholders

Current Planning Strategy

  • Regular after-tax contributions made to a sinking fund
  • Sinking fund assets held in money market instruments and CDs
  • Term life insurance on some partners (non-deductible expense north of $70K/year)

Improvement Opportunities​

  • Accumulate buy-out savings with greater tax-efficiency
  • Enhance the yield of sinking fund earnings without switching to riskier asset classes
  • Eliminate non-deductible and increasing term life insurance expense
  • Cover all shareholders with life insurance quickly and easily

Updated Stock Redemption Strategy

  • Repositioned a portion of sinking fund assets into company owned life insurance (COLI)
  • Firm immediately realized an enhancement on their balance sheet (i.e. no expense)
  • COLI assets immediately earn an enhanced yield, tax-free
  • Cash values can be used to repurchase equity when required (i.e., retirement, no longer able to work)

Death benefits provide:​

  • Money to fund repurchases at death
  • Cost recovery to the company

​Ideal Firms

Numerous opportunities exist for conservative, mature for-profit companies to take advantage of a similar repositioning of their conservative safe-dollar liquid assets into COLI.  Common industries include:

  • Construction
  • Consulting companies
  • Doctor groups
  • Law firms
  • Manufacturers
  • Marketing firms
  • Other firms with multiple partners with buy-out requirements

Initial Questions for CEOs/CFOs

  • What are you (your firm) trying to accomplish?
  • Who is to benefit?  Owners?  Executives?  Both?
  • What is the tax status of the entity (or entities) involved?

Once we have an understanding of a company’s priorities, we can look at a variety of structures that will enhance the liquidity and tax-efficiency of the firm’s safe-dollar assets.  Connect with us to design customized business life insurance solutions.