The High Cost of Getting It “Mostly Right”: A Real-World Life Insurance Miss

Most business owners don’t spend much time worrying about life insurance paperwork.
If the policy is active and premiums are paid, it feels like the box is checked.

And in most cases, that’s true—until it isn’t.

We were recently brought into a case that looked clean on the surface. But just beneath that surface was a technical miss with the potential to trigger hundreds of thousands of dollars in unnecessary taxes.

The Setup: Policies Placed, Problem Created

A few years ago, a business owner secured life insurance on key employees through a trusted relationship. The process was straightforward, and the goal was simple: get coverage in place.

The Oversight: A Small Miss Step with Big Consequences
Under IRS Code §101(j), when a business owns a life insurance policy on an employee, specific notice and consent requirements must be met before the policy is issued or transferred.

These are not optional.
If the employee isn’t a shareholder (as is often the case), they must receive written notice and provide written consent before the company can be both owner and beneficiary.

In this case, that step never happened.

No forms were signed. The IRS could treat the death benefit to be taxable. What the owner assumed would be a clean, tax-free benefit for the business was actually a future tax liability waiting to happen.

The Catch—and the Fix
Thankfully, the company’s internal legal counsel spotted the issue during a routine policy review and called us in.

Our team at Collaborative Insurance Solutions quickly diagnosed the gap and helped guide the business through corrective action—before any triggering event made the mistake permanent. We collaborated with counsel to protect the intended tax treatment.

The Lesson: Insurance Is Not Just a Transaction
This is a story about what happens when insurance is treated as a product instead of a plan.

Many insurance solutions are built to meet immediate needs. And for straightforward situations, that’s often enough. But when policies intersect with corporate structure, estate planning, or tax law, even small oversights can create significant downstream consequences.

At Collaborative Insurance Solutions, we work hand-in-hand with attorneys, CPAs, and financial advisors to ensure those intersections are addressed with intention. Our reviews don’t stop at premiums and coverage—we evaluate ownership structures, tax implications, and whether the plan can withstand legal or IRS scrutiny.

If You Own Business Insurance, Don’t Assume It’s Bulletproof

Whether your coverage supports a buy-sell agreement, protects key people, or underpins executive retention, it’s worth asking:

• Were the correct notice and consent forms signed before issue?
• Are ownership and beneficiary designations accurate today?
• Will the tax treatment you’re expecting actually hold up?

If there’s any uncertainty, let’s talk. Because in insurance planning, “almost right” can still go very wrong—and the cost of fixing it later is often far higher.