Policy Exchange Riders and Key Employee Insurance

Policy Exchange Riders and Key Employee Insurance

A policy exchange rider (often called a substituted insured rider or exchange of insureds option) provides that at the termination of the insured’s employment, a new key employee can be substituted as the insured under the original policy (assuming the new person can provide evidence of insurability). Of course, appropriate adjustments in premium, cash value, or face value are made to the policy reflecting differences in age or insurability between the original insured and the…

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Does a Business Have Insurable Interest in Key Employee Life Insurance?

Does a Business Have Insurable Interest in Key Employee Life Insurance?

Insurable interest is essentially the expectation of a financial benefit from the continued life of the proposed insured. The question in basic terms is, “Does the business expect to benefit financially from its relationship with the proposed insured?” Generally, a business has an insurable interest in the life of a key employee if the continued success of the business depends upon the special skills and talents of the key employee, and the policy is purchased…

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How Does a Business Account for Key Employee Life Insurance?

How Does a Business Account for Key Employee Life Insurance?

Accounting for key employee life insurance depends on the type of policy. Term insurance premium payments represent a pure current expense. Such costs should be charged against income rather than retained earnings. Insurance premiums paid on a permanent (cash value) type of policy are bifurcated. To the extent a premium payment generates an increase in the policy’s cash value, a charge should be made to an asset account. To the extent the premium paid exceeds…

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Is There a way Around Nondeductability of Premiums with Key Employee Life Insurance?

Is There a way Around Nondeductability of Premiums with Key Employee Life Insurance?

For a way around nondeductability of premiums, as a practical matter, the answer is no. This limitation extends to both term and permanent coverage. As a general rule, a client will not be allowed an income tax deduction for the payment of key employee life insurance premiums. Discover our articles archive here. View the latest policies Lifequotes has to offer. Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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How Much Insurance Should a Business Purchase on its Key Employee?

How Much Insurance Should a Business Purchase on its Key Employee?

A common method of calculating the economic effect of the loss of a key employee is the discount approach. This technique applies a percentage discount to the fair market value of the business. The discount approach requires an appropriate discount factor. Some authorities believe that if the business will survive the loss of the key employee and, in time, will hire a competent replacement, an appropriate discount factor is 15 to 20 percent. But if…

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Transfer for Value Issues of Key Employee Life Insurance

Transfer for Value Issues of Key Employee Life Insurance

Where a key employee policy – or an interest in a key employee policy – has been transferred for any type of valuable consideration, proceeds may lose their income tax free status. Fortunately, even if there has been a transfer for value, there are exceptions which, if met, will enable the policy proceeds to maintain their income-tax-free status. These exemptions allow transfers to the following transferees: the insured; the insured’s partner; a partnership in which…

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Tax Implications of Key Employee Life Insurance

Tax Implications of Key Employee Life Insurance

Premiums paid by the corporation are not tax deductible. Premiums paid by the corporation will not be taxable to the insured employee as long as that person is given no current rights in either the policy or its values. If the proceeds are payable to the employee’s estate or personal beneficiary, the result changes. In that case, premiums will likely be taxable to the employee where the policy is owned by the corporation and the…

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The Requirements of Key Employee Life Insurance

The Requirements of Key Employee Life Insurance

Key employee insurance should be owned by and payable to the corporation, which should also pay the premiums. As will be noted below under the discussion of taxation, adverse consequences are likely when the proceeds of an employer-owned policy are paid to a party other than the corporation or its creditors. A corporate resolution should be entered into the corporate minutes stressing that the coverage has been purchased to indemnify the business for potential loss…

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Advantages and Disadvantages of Key Employee Life Insurance

Advantages and Disadvantages of Key Employee Life Insurance

There are a number of advantages of key employee life insurance. Understanding them can help you make a much wiser financial decision. Here is a contained list of 4 advantages/disadvantages. These include: The value of the business owners’ investment (and the ongoing credit of the business itself) is stabilized and maximized immediately by the existence of key employee life insurance coverage. During the insured’s lifetime, policy cash values are carried as a corporate asset and…

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When to use Key Employee Life Insurance

When to use Key Employee Life Insurance

Key employee life insurance is an important piece of employee benefits that can protect you and your key employees. Understanding when to utilize key employee life insurance will help you make a wiser financial decision. When the profits or the financial soundness of a client’s business would be threatened or when a client’s business will have a difficult period of adjustment following the death of a key employee such as a leading salesperson or an…

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