Under normal circumstances, April 15 would act as the deadline for business owners to file their taxes with the federal government. However, as with nearly every aspect of life, the COVID-19 outbreak has pushed that date back –– to July 15, to be exact. Given that fact, many business owners may be making use of the extra time to review their own accounts for any potential deductions they may have missed. In fact, we’re often asked about the tax-deductibility of some of our policies.
So, is key man insurance tax deductible?
The short answer is no. We’ll explain why here:
Key Person Insurance Premiums
There are three actors in any life insurance policy. The owner, who is the person or entity who owns the policy. The beneficiary, the person or entity who receives payouts from the policy, and the insured, the person whose life has been insured by the policy.
In regard to a key person (also known as “key man”) insurance policy, the business itself acts as both the owner and the beneficiary. Meanwhile, the key employee is the insured member of the policy. Note here that businesses do have to get permission from an employee to designate them as a key person. And, in some instances, businesses may even transfer ownership of the policy to the key person themselves.
Because businesses act as both owner and beneficiary of a key person insurance policy, they are responsible for making the premium payments. These payments are not tax deductible. They have to be paid with after-tax dollars.
A caveat to this, when key person insurance is combined with executive compensation strategies like qualified 412(i) plans and non-qualified deferred compensation there would be instances where there could be a tax deduction.
Key Person Insurance Benefits
The reason why key person insurance premiums aren’t tax deductible is that any benefits paid out as a result of the policy are income-tax free - which is a BIG plus. So should a key employee die or become disabled, the compensation that the business would receive from the policy wouldn’t count toward its taxable revenue. (The one exception to this rule are C corporations, which receive life insurance policy payments within their alternative minimum tax figure.)
As a quick reminder, key person insurance benefits include:
- Overhead costs.
- Cost of hiring temporary personnel.
- Cost of recruiting, hiring, and training a permanent replacement.
- Losses sustained as a result of the absence of a key person.
Most key person insurance policies last for a fixed term –– typically until the key person’s planned retirement date.
Cost of Key Person Insurance
The cost of key person insurance depends on a variety of factors, such as:
- The key person’s salary
- The key person’s contributions to a business’s revenue and income.
- The costs associated with replacing the key person.
- The key person’s age, lifestyle, and overall health.
- The amount of coverage a business chooses to include in their policy.
If you’re considering purchasing key person insurance, use our free calculator to help you determine the potential cost.
Contact the Pros
Our team at Helm Financial has the tools, resources, and the experience needed to help you plan for your business’s future with confidence. We’re experts in key person insurance, and we’ll work with you to find the best quote possible. Contact us here to get started.
This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.