The partners in a business buy life insurance that is to help the company buy back the shares of a partner at his/her death. By doing so partners avoid having their heirs as new partners in the company. The insurance also serves as a protection of the family estate of the shareholders.
Undistributed profits of the company are invested in a corporate held life insurance contract where they grow tax free. At retirement the insured shareholder receives as pension supplement regular annual loans that are secured with the policy cash values.
The shareholder’s estate can receive the savings of the corporation as a tax-free dividend paid from the Capital Dividend Account, if the savings have been invested in a corporately held life insurance.