The term "Key Employee Insurance" is applied to
characterize all types of insurance protection paid by a business on any
employee's life. The label is used without reference to the reason the
insurance protection was acquired or the anticipated use to which the
proceeds will be put. If a business has acquired insurance coverage on
the life of an employee or stockholder, the policy contract, in all
likelihood, is accounted for on the corporate books as key employee
insurance. In fact, the insurance could have been acquired for any one
(or a combination) of the following purposes:
- To indemnify the business for the loss of the key employee's
services
- To fund a deductible deferred compensation plan containing a death
benefit.
- To provide the necessary financing for a corporate buy-out of
business interest or stock; i.e., a Section 303 stock redemption.
- To provide dollars to the business to help it survive the loss of
a key employee
A key employee could be an owner/stockholder. It could be a top sales
person or manager or an office manager. Who do you have in your
business, whose lose would cripple your business. Loss of a key
employee's services can hurt or kill a business, whether it is a new or
mature one.
The premiums on key person life are not deductible to a business. The
death benefits received would be tax free, subject to alternative
minimum income taxation.
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