Taxation Information for Key Person Insurance:
The taxation of Key Person Insurance is not the same for every company—many company variables and variations determine how this taxation is handled, so it is important to know all the facts.
Some ways to ensure a clear understanding of these policies are to consult a local tax office on the latest regulations and verify the information with an account, as there are many ways taxation can be treated.
Here is some basic information on Key Person Insurance and how taxation 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. It 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 company’s Chief Executive Officer or founder.
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 some stipulations are associated with this taxation.
Key Person Insurance may only be tax-deductible if the premiums are charged to the individual covered through taxable income. Although this may be unfavourable for the key man being covered, some companies offer these employees incentives to keep them on board.
Other tax issues 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 company’s primary shareholder, 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 the business returns to its regular 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.