Business Life Insurance

<div class="Section1"><br /> <br /> As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.<br /> <br /> For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee’s death would have on the business. Business life insurance is also commonly used in the context of a buy-sell agreement, where the business is obligated to purchase the ownership interest of an owner who dies. The insurance also could be used to fund a non-qualified retirement package for a single employee or a number of employees.<br /> <br /> </div>

<div class="Section1"><br /> <p class="PA">As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.</p><br /> <p class="PA">For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee&rsquo;s death would have on the business. Business life insurance is also commonly used in the context of a buy-sell agreement, where the business is obligated to purchase the ownership interest of an owner who dies. The insurance also could be used to fund a non-qualified retirement package for a single employee or a number of employees.</p><br /> <br /> </div><br />

<div class="Section1">No. This is true regardless of who is named as policy beneficiary. Premiums paid for any life insurance, or endowment or annuity contract, are not deductible if a taxpayer is directly or indirectly a beneficiary under the policy or contract.<a href="#_ftn1" name="_ftnref1">¹</a> The premium paying partner will derive a benefit from the policy even if the insurance is purchased as a key person policy or to finance the purchase of an insured&rsquo;s partnership interest.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a partnership on the life of an employee who is not a partner.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.264-1.<br /> <br /> </div></div><br />

<div class="Section1">No. This is true regardless of who is beneficiary under the policy. In the case of a sole proprietorship, premium payments are treated as nondeductible personal expenses because a sole proprietor and the business are considered one and the same for tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a sole proprietor on the life of an employee.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 262(a); Treas. Reg. &sect; 1.262-1(b)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> IRC Section 79 allows an employer to provide up to $50,000 of tax-free group-term life insurance coverage to each of its employees.<a href="#_ftn1" name="_ftnref1">¹</a> More specifically, the employee may exclude the value of the group-term life insurance that does not exceed the sum of (a) $50,000 and (b) any amount paid by the employee toward the purchase of the insurance.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Group-term life insurance that is excludable under Section 79 can also be offered through a cafeteria plan (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8897">8897</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8783">8783</a> for a discussion of how it is determined whether the value of the insurance exceeds the $50,000 limit and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8784">8784</a> for a discussion of situations in which the $50,000 limit may not apply. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8785">8785</a> for the nondiscrimination requirements applicable to Section 79 plans.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 79(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 79(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop. Treas. Reg. &sect; 1.125-1(k).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For purposes of the nondiscrimination requirements that apply to IRC Section 79 plans (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8785">8785</a>), a key employee is an employee who, at any time during the employer&rsquo;s tax year was:<br /> <p style="padding-left: 40px;">(1)&nbsp; an officer of an employer having annual compensation greater than $230,000 in 2025. No more than the greater of (a) three individuals or (b) 10 percent of employees need to be treated as officers, but in any event no more than 50 individuals may be considered officers;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; a more-than-5 percent owner of an employer; or</p><br /> <p style="padding-left: 40px;">(3)&nbsp; a more-than-1 percent owner, determined without considering those employees who are not counted in testing for discriminatory eligibility, having an annual compensation from an employer of more than $160,000 in 2025.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> A key employee also is any former employee who was a key employee when he or she retired or separated from service.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> For purposes of determining corporate ownership, the attribution rules of IRC<br /> Section 318 apply. Rules similar to the attribution rules apply to determine non-corporate ownership. In calculating attribution from a corporation, a 5 percent ownership test will apply rather than a 50 percent test.<br /> <br /> In determining the percentages of ownership, only the particular employer is considered; other members of a controlled group of corporations or businesses under common control and other members of an affiliated service group are not aggregated. They are aggregated for purposes of determining the employee&rsquo;s compensation and in testing for discrimination.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect; 79(d)(6), 416(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 79(d)(6).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 414(t); <em><em>see also</em></em> Temp. Treas. Reg. &sect; 1.79-4T, A-5.<br /> <br /> </div></div><br />

<div class="Section1">No. Even if the stockholder has the right to designate the policy beneficiary, the premiums are not income to the stockholder, provided that the beneficiary’s right to receive the proceeds is conditioned on the transfer of stock to the corporation.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Similarly, premiums are not taxable income to an insured stockholder when a trustee is named beneficiary, provided that the trustee is obligated to use the proceeds to purchase the insured’s stock for transfer to the corporation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Sanders v. Fox</em>, 253 F.2d 855 (10th Cir. 1958); <em>Prunier v. Commissioner</em>, 248 F.2d 818 (1st Cir. 1957); Rev. Rul. 59-184, 1959-1 CB 65.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 70-117, 1970-1 CB 30.<br /> <br /> </div>

<div class="Section1"><br /> <div class="Section1"><br /> <br /> If the life insurance policy at issue is purchased for the benefit of the business and the insured has no ownership interest in the policy, the premiums generally are not taxable to the insured. Thus, premiums paid on key person life insurance, where an employer is both owner and beneficiary of the policy, are not taxable to the insured employee.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If life insurance premiums are paid by an employer on a policy insuring the life of an employee and the proceeds are payable to the employee’s beneficiary, some taxable income to the employee generally results.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Casale v. Commissioner</em>, 247 F.2d 440 (2d Cir. 1957); <em>Lacey v. Commissioner</em>, 41 TC 329 (1963), <em>acq</em>. 1964-2 CB 6; Rev. Rul. 59-184, 1959-1 CB 65.<br /> <br /> </div><br /> </div>

<div class="Section1">No, because of the general rule that premiums paid on any life insurance policy, or endowment or annuity contract, are not deductible if a taxpayer is directly or indirectly a beneficiary under the policy or contract.<a href="#_ftn1" name="_ftnref1">¹</a> When a policy is purchased as key person insurance or to finance the purchase of an insured’s partnership interest, the insured’s estate and, therefore, the insured, will benefit from the policy.</div><br /> <div class="Section1"><br /> <br /> Even if a partner takes out insurance on the partner’s own life and irrevocably designates a copartner as beneficiary to induce the copartner to leave the copartner’s investment in the firm, the insured partner is <em>indirectly</em> a beneficiary under the policy, and so the premiums cannot be deducted.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.264-1.<br /> <br /> </div>

<div class="Section1">No. The premiums are nondeductible because they either are personal expenses or expenses allocable to tax-exempt income (the death proceeds).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 262(a), 265(a)(1); <em><em>see</em> Whitaker v. Commissioner</em>, 34 TC 106 (1960).<br /> <br /> </div>