Key man life insurance can help your business lower the risk of disruptions to productivity by paying a death benefit if a critical employee passes away.
A key man life insurance policy can also come with employee benefits. This is true if the company moves the life insurance policy to the insured employee. While key person life insurance premiums can’t be deducted from taxes, the proceeds that come from the policy don’t come with taxes.
If you’d like to learn more about the key man life insurance tax treatment then keep on reading and we will take you through everything that you will want to know!
Tax Treatment of Key Man Life Insurance
Usually, the cost of key man life insurance can’t be deducted from taxes. Premiums need to be paid using after-tax dollars. Your business will only be able to deduct key man insurance premiums if they are seen as a part of the worker’s taxable income.
In this instance, the employee tends to be the beneficiary. This is usually the case with group life insurance as opposed to key man life insurance.
If the person who is insured passes away then the key man’s policy death benefit will be paid to the company free of income tax. The only exception to this rule is for C corporations. In this kind of situation, the death benefit is going to be added to the calculation of the alternative minimum tax (AMT) due.
With all that said, if your company chooses to sell the key person life insurance policy, you might need to pay taxes. This is going to depend on the size of the settlement. It is also going to depend on how much money is being paid in premiums.
Every year, your business is going to need to include details about the coverage with its corporate tax return. This information can include the amount of coverage in force and the number of employees that are insured.
It will also state whether every insured employee has given written permission for the policy to be bought.
Tax Treatment for Employees
When a company is the sole owner of the policy, then taxes won’t need to be paid.
If you move ownership of the key man policy to the employee then they might have to pay taxes.
The Importance of Knowing About Key Man Life Insurance Tax Treatment
Hopefully, after reading the above guide, you now have a better understanding of key man life insurance tax treatment. As we can see, this policy can be beneficial for employers and employees. Make sure you talk with your colleagues and see if this kind of life insurance policy can be useful for your company.
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