Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Insurance on a key employee’s

Key Employee Life Insurance Chapter 43Employee Benefit & Retirement Planning

Copyright 2009, The National Underwriter Company 1

Insurance on a key employee’s life owned by the employer with death benefit payable to employer

What is it?



1. Corporation will incur obligation to pay a specified beneficiary or class of beneficiaries at employee’s death under death benefit only (DBO plan)

2. Employer needs way to finance nonqualified deferred compensation arrangement with employee upon death of employee

When is it indicated?



3. Closely held corporation needs liquid assets at death of key employee to maintain business operations

4. Corporation will need liquid assets to purchase stock from shareholder-employee’s estate

When is it indicated?



To the employee– No income tax to a key employee or their estate when

corporation• owns the policy

• pays the premiums

• receives the death proceeds from key employee life insurance

– Corporate-owned key employee life insurance may affect federal estate tax paid by deceased key employee’s estate

Tax Implications



To the corporation1. Corporation may NOT deduct corporate-paid premiums

on life of key employee when corporation is owner and beneficiary of life contract

2. Death proceeds of key employee life insurance are tax-free when paid to corporation (except for AMT potential)

Tax Implications



To the corporation3. Possible corporate exposure to accumulated earnings tax

if accumulating earnings to pay life insurance premiums brings corporate accumulated earnings above a threshold limit

4. Possible corporate exposure to corporate alternative minimum tax

Tax Implications



• Personally owned insurance• Use corporate funds to pay additional compensation

Alternatives



1. Key employee life insurance can help a closely held corporation continue operations.

2. Although the corporation owns the policy and pays the premiums, death proceeds from key employee life insurance are included in the employee’s estate.

3. Corporate-paid premiums on life insurance for a key employee are tax deductible for the corporation.

True or False?



4. Use of key employee life insurance allows the corporation to avoid exposure to the corporate alternative minimum tax (AMT).

5. Because of its greater cost, personal life insurance is not a viable alternative to key employee life insurance.

True or False?



Under what circumstances is key employee life insurance

a. Vital for a company to have

b. Nice to have, but not essential

c. Relatively unimportant

Discussion Question

Documents

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Insurance on a key employee’s