…"key person insurance"…can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy.( http://en.wikipedia.org/wiki/Key_person_insurance)
Most small businesses carry life insurance on the principals. This insurance can have a number of uses including providing for the principle’s family, to buy out deceased partners, help collateralize business loans and others.
Talk with your trusted insurance professional and accountant to make sure you have the ownership correct to minimize tax impact on you or the company. If you own the policy personally and the company pays the bill you will likely need to report the premium as income but will save your family taxes should they need the proceeds. If you have the company pay the bill and do not pay income tax on the premiums then if you die the proceeds to your family will be taxable. If it is your intent that the company use the proceeds from the life insurance to replace you and survive it is likely that you will want the beneficiary be the company.
It gets tricky if your bank requires you have insurance to pay off company debts in the event of your death. If you hold a bank pay off policy personally then the company may have to pay taxes on the money used to pay off the loan. Ownership of policies used to fund partner or fellow stockholder buy out agreements can also be tricky and you will need to make sure the buyout agreement and the policy ownership work together. Bottom lines is get good advice and structure the ownership and beneficiaries on the policies so they accomplish what you intended and minimize tax impact.
If you are considering Key Man life insurance on employees that would be costly or difficult to replace first consider what would happen if they leave for some other reason such as joining a competitor or to pursue their own entrepreneurial venture. If they are key and not tied to the company then you need to make other plans to reduce the impact of their leaving including capturing their knowledge and abilities in systems and written procedures.
Original Content (c) Thomas Robinson
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