In a Key Person Life Insurance Policy, how are premiums treated for taxation purposes?

In a Key Person Life Insurance Policy, the premiums are treated as non-taxable to the company. This means that a business cannot deduct the cost of the premiums from its taxable income. The rationale behind this is that the insurance policy is designed to protect the business from the financial loss associated with the death of a key employee, not to serve as an employee benefit. Consequently, while the premiums are not deductible, the death benefit payout received by the company upon the death of the key person is generally received tax-free.

This treatment underscores the understanding that key person insurance is a financial strategy intended to safeguard the business's continuity rather than providing a direct tax advantage through premium deductions. As a result, businesses should consider the overall financial impact and benefits when investing in Key Person Life Insurance rather than relying on tax deductions for premium costs.