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How IRS Tax Exempt Rules Affect Key Man Life Insurance

Here's some life insurance benefits you may not know about.

By McKenzy Bowers | July 25, 2008

How does the 2008 IRS tax exempt rules Key Man Life Insurance for S-Corporations? To find out, read on.

A 2008 Internal Revenue Service addressed the tax exempt treatment of life insurance policy proceeds on Key Man life insurance policies of Sub-chapter S-Corporations; medical and/or otherwise.

The 2008-42 Revenue Ruling addresses the issue of whether an AAA financial credit rating will be affected by the following two factors:

  1. The premiums paid by an S-corporation on a life insurance policy owned by the employer
  2. The benefits assured to the concerned S-corporation due to the death of the insured

In 2008, the Internal Revenue Service ruled in this area while addressing the tax-exempt treatment of the life insurance policy. The ruling concluded that the two factors mentioned above; mainly the premiums paid by the beneficiary and the benefits accorded to the corporation after death of an insured employer, do not reduce the S-Corporation’s AAA. Further, the benefits received because of the death of the insured from an employer-owned life insurance contract that meets an exception under Code Sec. 101(j)(2) do not increase its AAA.

What does this mean?

Basically, life insurance proceeds on “key-man” life insurance policies in an S-Corporation are essentially trapped in the corporation.  Any distribution of that cash to surviving S-Corporation shareholders – or to the estate of the deceased shareholder – triggers a taxable event.  It is therefore vital for any business with a life policy paid by the business, or other S-corporation, to discuss the tax policy and estate planning particulars with your accountant.

More About Key-Man Insurance Policies and Small Business Life Insurance

Check out this quick video for additional information about key-man and other business-related life insurance.

If you want to want to learn more about Key Man Life Insurance or want more information, talk to AccuQuote. We can answer all your life insurance questions. And if you want some competitive life insurance quotes from the top-rated insurance companies in the marketplace, talk to us.


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