Massachusetts Life Producer Practice Exam

What is a valid reason for small corporations to insure the lives of its major stockholders?

1. Enhance company reputation

2. Provide employee healthcare benefits

3. Establish a buy-sell agreement

4. Minimize taxation on dividends

The correct answer is: Establish a buy-sell agreement

A valid reason for small corporations to insure the lives of their major stockholders is to establish a buy-sell agreement. This type of agreement is crucial for ensuring a smooth ownership transition in the event of a stockholder's death. By having life insurance in place, the corporation can use the death benefit to purchase the deceased stockholder's shares from their estate, thereby providing liquidity and stability to the business. This prevents potential disputes among heirs and ensures that the remaining stockholders retain control of the company. Implementing a buy-sell agreement with life insurance also helps to protect the business’s continuity. It ensures that the remaining shareholders are not forced into an unwanted partnership with outsiders or heirs who may not align with the company’s goals. This planning tool can be critical for maintaining the corporation’s operational integrity and financial health. The use of life insurance makes this process financially feasible and straightforward, which adds to its effectiveness as a strategy for small businesses.