The cost of life insurance for key individuals who are not tax deductible must be paid with the after-tax money. However, businesses can sometimes deduct costs if it means that the employee`s taxable income increases. Companies take out key men`s life insurance policies to protect against loss. If someone in the company were to die, it would affect the amount of money they earn by buying this type of insurance. Examples: If someone is essential to your business and they were to die, your business might not survive. When this happens, you can use a “key man policy” to pay off any debt left by the person. The key man`s policy will also give money back to the company`s investors. If you borrow money, the lender may want to make sure the loan is repaid. You`ll need different amounts of key person insurance depending on how much your business depends on the person and the type of employee they are. It is best to buy enough key man insurance to avoid negative effects when they can no longer work. Each year, your business must include details about coverage on its corporate tax return. This information may include the number of insured employees, the extent of coverage applicable, and whether each insured employee has given written authorization to purchase the policy.
Contact your tax professional to ensure that your business fully meets all requirements and documents. A key man policy can also be a benefit to employees if the company transfers the life insurance policy to the insured officer or employee. Although life insurance premiums for key individuals are not tax deductible, the proceeds of the policy are generally provided to the corporation without income tax. Key person insurance is simply a life insurance policy for the key person in a business. In a small business, it`s usually the owner, the founders, or perhaps one or two important employees. These are the people who are crucial to a business – those whose absence would sink the business. You should definitely consider key person insurance for these people. New employees have often signed a large amount of documents, including life and health insurance agreements or even applications for these services. Until 1984, companies could use and deduct COLI policy premiums for tax benefits. Many companies that hired new employees in the 1990s began to secure their employee base indiscriminately and rarely received their written permission to do so. Key Man Life Insurance helps businesses reduce the risk of business interruption by providing a death benefit when essential employees die.
How much key person insurance do you need? It depends on your business, but in general, you should get as much as you can afford. Look around and get the prices from different agents; Most life insurance agents will sell you a key person policy. Be sure to apply for term life insurance – many agents will push life or variable, which has much higher premiums and commissions, but is not necessary for a Schlüsselman policy. Ask for offers of $100,000, $250,000, $500,000, $750,000 and $1 million, and compare the cost of each. Then think about how much money your business would need to survive until it could replace the key person, update itself, and get the business back on its feet. Buy a policy that fits into your budget and covers your short-term cash flow needs in the event of a tragedy. Banks and the SBA often require Keyman life insurance for loans or investments. Indeed, it could be difficult for a small business to survive without one or two employees. The same can happen with investors, so they may want peace of mind that losing these people would not put the company out of business. Large life insurance policies for executives can also be used as an incentive for an employee to stay with the company. For example, you can purchase permanent life insurance that they receive when they retire. Or you could give it to them after a certain number of years or if they do well in their work.
COLI is typically used to protect the interests of the company and protect against things like the unexpected death of an employee. Since the company is the beneficiary of the policy, it can decide if and how to use its current value and is also able to borrow against it or make withdrawals against it. The key life insurance policy differs from other life insurance plans in that the business is both the owner and beneficiary of the coverage. Although a large employee life insurance policy is typically underwritten for high incomes, the face value of the policy is often limited to a multiple of the insured`s income, such as 10X.