What is the name of your state (only U.S. law)? WA
I am the owner and sole employee of a personal services corporation as a consulting engineer. I would like to buy life insurance with my wife and kids as the beneficiaries. Is it legal to buy life insurance with my corporation as the beneficiary ("key man" insurance, deductible as a business expense) and then will the assets of my company to my wife and kids on my death?
Thanks very much for any help!
Gerrit
I think your accountant is intermingling two different types of key man insurance.
A business is not the best way to pass on life insurance proceeds to loved ones.
The first is basic "business loss replacement" Key Man coverage.
Which is certainly a deductible expense. But the beneficiary will be the business.
Being a sole proprietor, the only reason you would really need this type of coverage would be to cover any outstanding business expenses (debt).
And as stated before, insurance proceeds are tax-free when left to individuals; so the business is not how you want to pass on life insurance money to your loved ones.
But...... you are able to bonus yourself (on your W-2 income) a "162" executive bonus to buy insurance with on an individual basis.
Yes, it is still taxed as income, but it is not treated as a dividend, and it is also deductible on your schedule C, which will reduce your AGI.
In short, it helps to lower you AGI.
It also reduces your SS & Medicare taxes on that amount by 7%, from being excluded from dividends.
But owners usually do this as a Retirement Planning Tool, and a way to defer retirement money in a tax advantaged way.
They use cash value life insurance which grows Tax Deferred and can be accessed Tax Free.
They reduce taxes now, minimize taxation on those retirement funds, create a tax free retirement income stream, and create a tax free death benefit for their loved ones.