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

Insuring the lives of major stockholders is a strategic decision for small corporations, primarily as a means to fund a buy-sell agreement. This type of agreement is essential in the event that a stockholder passes away or becomes incapacitated. When a major stockholder dies, their shares need to be transferred and valued fairly for the surviving partners or the corporation to maintain continuity of ownership. The life insurance policy provides liquidity to the business, allowing the remaining shareholders to buy the deceased's shares from their estate without financial strain.

In contrast, while paying off corporate debt is important, it does not directly tie to the specific arrangement of ownership transfer that a buy-sell agreement handles. Expanding business operations and providing employee benefits are also significant aspects of corporate strategy but do not focus on the ownership or financial obligations related to a stockholder's death. Thus, using life insurance as part of a buy-sell agreement uniquely addresses the needs of the corporation in maintaining stability and continuity of ownership in critical situations.