Key Person Life Insurance

Term life insurance is a type of life insurance policy that provides financial protection for a specific period of time, or "term", that typically ranges from 10 to 30 years. Term life insurance offers a cost-effective way to provide financial security for your company.

• Provides a death benefit to your company if the key employee dies during the specified term
• More affordable than permanent life insurance
• Premiums remain level (unchanged) during the selected term
• No cash value accumulation
• Expires at the end of the term if not renewed

• You choose a coverage amount (e.g., $500,000, $1 million, $2 million, or more)
• Select a term length that matches the employee's anticipated separation date (retirement age for example)
• Pay regular monthly or annual premiums
• If the employee dies during the term, your company (beneficiary) receives the full death benefit
• If the employee outlives the term, the coverage ends (unless renewed)

• Financial protection: It provides a death benefit to the company if a crucial employee, owner, or executive passes away, helping to mitigate the financial impact of their loss.
• Business continuity: The insurance payout can be used to replace lost revenues and profits, hire and train a replacement, and maintain the company's financial stability during a transition period.
• Debt repayment: In cases where the policy is used as collateral for a business loan, the death benefit can be used to repay outstanding debts.
• Investor protection: The insurance can provide funds to distribute to investors if the business needs to close down following the loss of a key person.
• Employee retention: Some policies can be structured to offer additional benefits to key employees, encouraging them to stay with the company long-term.
• Credibility maintenance: The insurance can help reinforce the company's financial stability and maintain good credit standing with lenders and suppliers.

• Non-deductible premiums: Premiums paid for key person insurance are generally not tax-deductible for the business. The IRS prohibits deducting these premiums as a business expense.
• Tax-free death benefits: In most cases, the death benefit received by the company is income tax-free. However, there are exceptions: (1) For C corporations, the death benefit may be included in the calculation of the alternative minimum tax (AMT), and (2) there may be taxable death benefits if certain requirements are not met.
• Impact on S corporations: While premiums are not deductible, S corporation shareholders must reduce their stock basis for their allocable shares of the expense. This can affect shareholders' ability to access cash on a tax-free basis.
• Policy surrender: If a company surrenders the policy, any gain would be taxed as ordinary income to the shareholders in the case of an S corporation.
• Employee taxation: If the company is the sole owner and beneficiary of the policy, there are typically no tax implications for the insured employee. However, if ownership is transferred to the employee, it may be considered taxable compensation.
• Annual reporting: Companies must include details about key person coverage in their corporate tax returns, such as the number of insured employees and coverage amounts.

Note: Be sure to consult with your tax professional about the tax treatment and implications of key person life insurance.