Life Insurance as a Solution
When life insurance is used to fund the loss of a key employee, the business is the owner and beneficiary of the life insurance policy on the employee. The business pays the premiums, and although the premiums paid on the life insurance policy are not a deductible business expense, the proceeds at death are generally received income tax free by the company.* If permanent type policies are used, there will also be a cash value buildup, which can be available to the business in time of need.
*To ensure the income tax-free nature of the death benefit for certain business-owned life insurance policies, it is necessary to comply with new Internal Revenue Code Section 101(j) for policies issued after August 17, 2006. These rules require that the insured/employee receive notice of, and consent to, the issuance of a life insurance policy where the business/employer is the owner and beneficiary of the policy and will continue to be the beneficiary after the insured leaves the business.
For more information on these rules and additional reporting requirements, please contact your tax advisor.