Life insurance beneficiaries?

[gerritb]

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

 

[ecmst12]

I don't see why you would want to, since life insurance proceeds are paid directly to the beneficiaries (non taxable) while assets passed via will must go through probate and possibly be subject to estate taxes...

 

[Zigner]

I don't see why you would want to, since life insurance proceeds are paid directly to the beneficiaries (non taxable) while assets passed via will must go through probate and possibly be subject to estate taxes...

He wants to do it this way so he can write it off as a business expense...

 

[ecmst12]

Sounds kinda shady to me....also would be causing his heirs more problems down the line.

 

[tranquility]

Yes, it is legal to buy. But, you don't get a deduction for key man insurance.

(Well, absent certain things like an S-corp owner, key-man and the premium is put on the owner/key man's W-2. That would not achieve the OP's purpose.)

 

[gerritb]

Thanks for the replies. My tax accountant tells me that key man insurance premiums are indeed a deductible business expense. My heirs will have to dispose of my corporate assets somehow anyway, so it seems like adding the insurance benefit to that wouldn't make that any worse.

 

[gerritb]

Hmm, sorry, didn't see the previous replies below and was going by memory. If the key-man premiums do show up on my personal W2 as income that wouldn't in fact do what I want. Maybe this isn't a good idea.

 

[Zigner]

The money is non-taxable if it goes directly to your heirs. Your accountant didn't tell you that?

 

[gerritb]

We didn't talk about that. I was just trying to buy the insurance pre-tax if possible.

 

[ecmst12]

Making your heirs wait for probate to get the insurance money won't help them do things like pay for your funeral though...

 

[gerritb]

Yes, that's a good point. The whole scheme is sounding like less of a good idea by the minute...

 

[tranquility]

People, he wants to reduce income taxes by buying life insurance. He does not get to do that. We are not talking about what happens when he dies.

 

[Betty]

In my opinion, not the best of ideas for the reasons noted.

 

[scadv]

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.