Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 Insurance on a key employee’s life owned by the employer with death benefit payable to employer What is it?

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company2 1.Corporation will incur obligation to pay a specified beneficiary or class of beneficiaries at employee’s death under death benefit only (DBO plan) 2.Employer needs way to finance nonqualified deferred compensation arrangement with employee upon death of employee When is it indicated?

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company3 3.Closely held corporation needs liquid assets at death of key employee to maintain business operations 4.Corporation will need liquid assets to purchase stock from shareholder-employee’s estate When is it indicated?

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company4 To the employee –No income tax to a key employee or their estate when corporation owns the policy pays the premiums receives the death proceeds from key employee life insurance –Corporate-owned key employee life insurance may affect federal estate tax paid by deceased key employee’s estate Tax Implications

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company5 To the corporation 1.Corporation may NOT deduct corporate-paid premiums on life of key employee when corporation is owner and beneficiary of life contract 2.Death proceeds of key employee life insurance are tax- free when paid to corporation (except for AMT potential) Tax Implications

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company6 To the corporation 3.Possible corporate exposure to accumulated earnings tax if accumulating earnings to pay life insurance premiums brings corporate accumulated earnings above a threshold limit 4.Possible corporate exposure to corporate alternative minimum tax Tax Implications

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company7 Personally owned insurance Use corporate funds to pay additional compensation Alternatives

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company8 1.Key employee life insurance can help a closely held corporation continue operations. 2.Although the corporation owns the policy and pays the premiums, death proceeds from key employee life insurance are included in the employee’s estate. 3.Corporate-paid premiums on life insurance for a key employee are tax deductible for the corporation. True or False?

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company9 4.Use of key employee life insurance allows the corporation to avoid exposure to the corporate alternative minimum tax (AMT). 5.Because of its greater cost, personal life insurance is not a viable alternative to key employee life insurance. True or False?

Key Employee Life Insurance Chapter 43 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company10 Under what circumstances is key employee life insurance a.Vital for a company to have b.Nice to have, but not essential c.Relatively unimportant Discussion Question