Are key person insurance premiums tax deductible?

Key person insurance premiums are classified as non-deductible for businesses. This means that the business cannot write off the cost of these premiums as a business expense on their tax returns. Key person insurance is designed to protect a business against the loss of a crucial employee whose absence could significantly affect the company's operation and profitability.

The rationale behind this tax treatment is that the insurance is intended to benefit the business indirectly by providing funds to cover any potential losses or costs associated with the loss of the key employee. Consequently, since the premiums provide a protection mechanism rather than a direct expense necessary for the operation of the business, they are not eligible for deduction.

In contrast, the payouts received from a key person insurance policy when a covered individual passes away are typically tax-free to the business. This ensures that the business can utilize the funds to cover any financial impacts resulting from the loss without incurring additional tax liabilities. Understanding the nature of key person insurance and its implications on taxation is crucial for businesses considering this type of coverage.