Question 9

Small corporations often purchase life insurance on the lives of major stockholders to fund a buy-sell agreement.

Life insurance is commonly utilized by small corporations to fund buy-sell agreements, ensuring that in the event of a major stockholder's death, the company can buy back the shares, thereby maintaining control and stability within the business.

A) take the federal income tax deduction

While certain life insurance premiums may be deductible, this is not the primary reason small corporations purchase life insurance on stockholders. The focus is more on ensuring continuity of ownership rather than tax benefits.

B) make a charitable bequest

Purchasing life insurance for the purpose of making a charitable bequest is not a typical reason for small corporations to insure major stockholders. The main goal of insuring key individuals is to secure the financial stability of the business rather than to support charitable causes.

C) reduce Social Security taxes

Using life insurance to reduce Social Security taxes is not a valid strategy. Life insurance does not directly impact Social Security tax obligations, which are based on income rather than insurance policies.

D) fund a buy-sell agreement

This option is correct as it directly addresses the primary purpose of purchasing life insurance on major stockholders. Life insurance provides the necessary funds for the corporation to execute a buy-sell agreement, ensuring the smooth transition of ownership and protection of the business's interests.

Conclusion

The rationale for purchasing life insurance on major stockholders primarily revolves around funding buy-sell agreements, which ensures that the corporation can maintain control and stability in the event of an owner's death. Other options, while potentially relevant in different contexts, do not address the core intent behind this financial strategy, making option D the definitive correct answer.