Key Man Insurance And The IRS

Key man insurance is a policy designed to compensate a business in the event of a tragic loss of an employee. There are two types of coverage, a death benefit and a disability benefit. Key man insurance is intended to compensate for company losses. It covers the cost to train a new employee, making them able to take over the key position that was vacated. It can also cover any profit loss the company encounters as a result of the tragic event. There are no rules which determine exactly how the company has to spend the claim. Even though key man insurance is taken out for a specific purpose, once the company receives the money, they can use it for anything they want. Some companies will share the money with the injured party or the family of the deceased employee. If your business is an S-corporation chooses to share the claim you should be aware of the IRS ramifications. Any funds that remain within the corporation remain tax free. Once those funds are distributed to any employee of the corporation, the money becomes taxable. Before you decide to disburse a claim for key man insurance, see your accountant for tax advice.