Key Man Life Insurance and Tax Deduction

Is your business well-prepared to bear the loss of a senior executive? This is one question that every business entrepreneur should ask himself. Most of them would probably have no as an answer. Biggies like Apple Inc. have well-laid out strategies for their future. It is common knowledge that Steve Jobs, Founder and ex-CEO of Apple is not keeping well these days. He is suffering from pancreatic cancer. Recently, he resigned from his position as CEO.

Key Man Life Insurance Tax Deduction

One of the greatest benefits of this kind of life insurance is that the death benefit is usually tax free. There are tax deductions for the premiums that the employer pays for key man life insurance. But the proceeds that the company will receive after the death of the key employee will not carry any tax deduction or minimum if any.

In the recent years, there have been some amendments related to key man life insurance tax deduction. According to the latest law, one needs to meet the following requirements to prevent any tax deductions:

  1. The key person or employee should be informed beforehand that he is being insured by the company. He should also be divulged the total amount that he is being insured for. The key person should also be notified that the employer/company is the key man insurance beneficiary of the entire or partial death benefit.
  2. The key employee should give in writing that he is aware that his employer is buying a key man life insurance for him.

It is imperative that before you procure key man life insurance, you should be aware of the Notice and Consent requirements. The changes in the law pertaining to key man insurance tax deduction came after August 17, 2006. So, if you had bought a key man life insurance before this date, cancel it and buy one again. This way you will be able to save lot of money that will otherwise go wasted as tax.

A lot of companies use the cash value of the key man life insurance policy to lure the key person to stay in the organization till the retirement age. Some key employees give in to this temptation thinking that they will receive a large amount at the time of retirement.

Why is Key Man Life Insurance Needed?

Key man life insurance is the answer to all your short-term financial needs in the event of the death of a key person. Steve Jobs is a big example which shows that one should be well-armed to face the uncertain future. Key man insurance does just that. Death of a key person, supposedly CEO, manager, sales manager or owner, will have a deep impact on the company. To battle with this loss, many companies obtain key man insurance for their businesses.

It is unlikely that Apple will suffer a major setback because they are well equipped to deal with the death of a key person. And this is how every business house should be. Obtaining key man life insurance offers you financial stability that helps to withstand any key person’s loss