Business life insurance can be used to protect against the loss of a key person, reward key employees by splitting the cost of their insurance with employers or offer life insurance as a bonus to executives and other employees.
Key Person Life Insurance
Key Person life insurance is designed to indemnify the employer for the death of an employee who is vital to the continued success of the business.
How does it work?
- Employer pays the life insurance premium on a policy insuring the Key Person's life.
- Employer owns the policy and is the beneficiary of the policy.
- Employer receives the life insurance death benefit, upon the death of the Key Person.
What are the advantages?
- Helps to offset the cost of replacing the Key Person.
- Strengthens the firm's credit by assuring creditors that the business will continue.
- Provides the business with cash values, in the life insurance policy, that can be accessed easily.
What are the tax considerations (under current U.S. federal tax law)?
- Life insurance death benefits received are income tax free.
- Increases in the cash values, in the life insurance policy, are tax-deferred.
- Premiums paid by the employer are not deductible for income tax purposes.
Executive Bonus Life Insurance
Executive Bonus is an efficient way for a business to pay the premiums on life insurance covering a key employee or business owner.
How does it work?
- Employer pays the life insurance premiums.
- Premiums are treated as a bonus for the employee.
- Employee pays the income tax on the bonus.
- Employee retains all rights to the policy.
What are the advantages?
- No IRS approval is needed for establishment.
- No administration is needed.
- Attracts, retains and rewards key employees.
What are the tax considerations (under current U.S. federal tax law)?
- Life insurance premiums are deductible as compensation to employee.
- Bonus is considered wages.
- Life insurance cash values accumulate tax deferred.
- Death benefits are income tax free to the beneficiary.
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