Taxation Information for Key Person Insurance:
The taxation of Key Person Insurance is not the same for every company – there are many company variables and variations that determine how this taxation is handled, so it is important to know all of the facts.
Some ways to insure clear understanding of these policies is by consulting a local tax office on the latest regulations and also verifying the information with an account as there are lots of ways taxation can be treated.
Here is some basic information on Key Person Insurance and how taxation of it works…
What is Key Person Insurance?
The formal definition of Key Person Insurance is “life insurance on a key employee, partner or proprietor on whom the continued successful operation of a business depends. The business is the beneficiary under the policy.”
In layman’s terms, Key Person Insurance is held by a company and covers an important person within the organisation to help guarantee the business will continue successfully if that person is disabled or passes away.
In a small business, this may be the business owner. In a larger organisation, insurance may cover someone such as the Chief Executive Officer or founder of the company.
Important Taxation Information for Key Person Insurance
One of the main purposes of a business holding Key Person Insurance is to help cover expenses until the person being insured can be replaced. In some cases, the premiums on this type of insurance may be tax deductible for the organisation, but there are some stipulations that are associated with this taxation.
Key Person Insurance may only be tax-deductible is the premiums are being charged to the individual that is covered through taxable income. Although this may be unfavorable for the key man being covered, some companies offer these employees incentives to keep them on board.
There are other tax issues that come into play with Key Person Insurance as well
These situations include inheritance tax, which may take effect with the key man’s company shares are not passed to living relatives such as spouses or children.
If Key Person Insurance is taken out on an employee who is also the primary shareholder of the company, tax relief may not be granted. Because of the many variations and situations that can arise regarding Key Person Insurance, it is important to consult experts on the subject to understand all the stipulations.
Key Person Insurance can be a great financial safety net for a company. This insurance will help the company continue running until the key man who has passed on is replaced and business returns to its normal operation.
Although this kind of insurance can have great benefits, it is also subject to many tax laws and regulations that can vary across the board. Having a full understanding of Key Person Insurance can help a company avoid these taxation pitfalls and insure the company will be protected in the event that its leader or founder passes away.