Key Man Life Insurance
A 2008 Internal Revenue Service addressed the tax exempt treatment of life insurance policy proceeds on key-man policies of Subchapter 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:
- The premiums paid by an S-corporation on a life insurance policy owned by the employer
- 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 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.