Key Man Life Insurance and Taxation

If your company owns life insurance policies on your executives or any key people for that matter, you need to be aware of the potential tax ramifications and the requirements to avoid taxation of benefits. Important changes have taken place in the last few years that can significantly impact the taxation of corporate owned life insurance. The information below is designed to inform you of the IRS regulations that have been implemented over the last few years and what is needed to comply with these IRS requirements so that policy proceeds avoid needless taxation.*

Pension Protection Act of 2006 and Life Insurance Taxation

On August 17, 2006, President George Bush signed tax legislation containing provisions that significantly impact key man and other employer owned life insurance purchased after August 17, 2006. The legislation, known as the COLI (Corporate Owned Life Insurance) Best Practices Act (which is part of the Pension Protection Act of 2006), includes the proposed IRC Section 101(j). Under this proposed law, life insurance death benefits for business-owned life insurance policies issued after the effective date of August 17, 2006 are income taxable (to the extent the death benefit exceeds the employer’s premiums) unless certain requirements are met.

This new legislation applies to all employer-owned policies issued after August 17, 2006 and includes policies used for key man insurance, stock redemption plans, Corporate Owned Life Insurance and Supplemental Executive Retirement Plans (among others). It may also extend to collateral assignment (economic benefit) regime split dollar and split dollar loans. With this law, all situations where an employer will have full or partial ownership of a insurance policy that is issued after August 17, 2006, regardless of the purpose of the policy, will need to meet certain requirements and follow specific guidelines to avoid potential taxation.

Avoiding Taxation of Key Man Life Insurance

In order to prevent policy proceeds (death benefits) from being income taxable, both of the following requirements must be met:

1. Notice and Consent Requirements:

a) The employee must be notified (in writing), prior to the life insurance policy being issued, that the employer intends to buy a policy on his/her life and disclose what the maximum face amount that is being applied for on his/her life is;

b) The employee must provide written consent to being insured and agree that the employer may choose to keep the policy in force even after the employee separates employment; and

c) The employee must be notified in writing that the employer is the beneficiary of all or part of the death benefit proceeds.

Under the COLI Best Practices Act, unless the employer provides written notice and obtains the employee’s written consent prior to the issuance of the policy, the death benefit of the life insurance policy will be taxable from day 1. Notice and consent may not be obtained after the life insurance policy is issued to remove this taxable death benefit status.

2. Once the “Notice and Consent Requirements” are met, there are two “Exceptions” to the rule taxing death proceeds payable to an employer, one of which must be met:

a.) Exception #1:

1) The insured was an employee at any time during the 12-month period before the insured’s death OR

2) The insured was a Director or “highly compensated employee” at the time the contract was issued.

b.) Exception #2:

Any amount received by the employer as a result of the insured’s death is paid to:

1) A family member of the insured;

2) A designated beneficiary of the insured under the contract other than the employer;

3) A trust established for the benefit of a family member, other designated beneficiary, or the insured’s estate; or

4) A family member, designated beneficiary, trust, or estate in exchange for any interest they hold in the corporation / employer (i.e. buy-sell agreement).

If both the “Notice and Consent Requirements” and one of the “Exceptions” above are met, Corporate Owned Life Insurance proceeds would be received income tax free if the policy death benefits would otherwise be eligible for favorable tax treatment.

COLI Best Practices Act- Reporting Requirements

All employers are required to report annually all corporate-owned life insurance policies to the IRS. The annual reporting requirements imposed under the IRC Sec. 6039I include:

1) The total number of employees at the end of the year;

2) The number of employees insured under COLI arrangement at the end of the year;

3) The total amount of insurance in force on all insured employees at the end of the year; and

4) The employer’s name, address, tax payer identification number and type of business, and

5) A statement of valid consent for each insured employee (or, if all required consents are not obtained, number of insured employees for who consent was not obtained).

The IRS requires this reporting annually on Form 8925 ” Report of Employer-Owned Life Insurance Contracts.” It is a simple form and must be completed to comply with IRS Code. You should consult your CPA or professional tax advisor immediately for more information on Form 8925 and the IRS reporting requirements.

If proper record keeping and reporting is not maintained, any and all key man life insurance policy proceeds or other corporate owned life insurance death benefits may be subject to income taxation

In Conclusion

Corporate Owned Life Insurance Policies including key man insurance policies issued after August 17, 2006 may have death benefits that are subject to income taxation if certain requirements are not met. The Pension Protection Act of 2006, which includes the COLI Best Practices Act, includes provisions that have significant consequences for key man and other employer owned insurance purchased after August 17, 2006. You need to understand the Notice and Consent requirements and well as the Exceptions and Record Keeping and Reporting requirements and comply with the IRS so that key man insurance policy proceeds avoid needless taxation. Unfortunately, if you have a key man policy issued after August 17, 2006 and you have not been compliant, your best bet to avoid potential income taxation may be to scrap your current policy and start over!

* All of the above tax information is for information purposes only and is provided to explain the basic tax treatment of life insurance based on the Internal Revenue Code. Any individual or entity considering any life insurance policy should consult with their own CPA or tax/legal advisor that understands their particular tax circumstances and the rules governing their state. In no way is this information intended to be tax or legal advice.

Speciality Insurance: From International Schools Insurance Policies To Military Insurance

All men and women serving in HM Forces, whether they serve with the Army, Navy or Royal Air Force, should consider getting life insurance for the financial security it provides to family members. There are special policies available not only to those in HM Armed Forces, but also international schools, teachers and expatriates.

Both international schools insurance policies and expats insurance policies provide cover that suits the requirements of those markets, which makes them more suitable for these situations than domestic insurance policies would be. However, if you are a serviceman or servicewoman you are probably more interested in the military insurance policies available. If you do not already have life insurance then perhaps it is time to take a look at some military life insurance policies. This is very important as it provides financial security for your entire family, especially if they depend on the money you bring into the household. If anything were to happen to you, your family would be left without an important source of income, so it is always better to prepare in advance for such situations.

If you know you are going to be deployed to a high risk area in a matter of weeks, or months, life insurance could be a good idea, but unfortunately most companies have limitations when it comes to insuring personnel preparing to deploy to such areas. Most life insurance companies will not provide cover if the person looking to get insured is aware of the fact that he or she will be deployed to a high risk area within the following 6 to 12 months. The solution is to get insurance way before any deployment plans start being formed, so it is better to act immediately and get insured while you are eligible.

Besides life insurance policies, there are also other insurance policies available, such as critical illness insurance cover. This policy covers both life-threatening and non-life-threatening conditions such as strokes, cancer, heart attacks, etc., and also covers debilitating conditions such as loss of limbs.

It should be noted that no insurance company is required to insure someone, so insurance companies can decide for themselves if they want to insure a certain individual or not. If the company feels the risk is too high, either due to the lifestyle of the individual, or his or her health, they can refuse to provide cover.

Those looking to get insured have the option of doing it online. Checking policies from different companies is also much easier to do online, as most of the information can be found on the website of each insurance company, and it is simply a matter of analysing which insurance company offers the best terms for a specific policy. Ordering online is simple and fast and usually it is simply a matter of filling out a form and waiting for the paperwork to arrive via email. You can also find a specially trained insurance broker who will help you find the most suitable policy for you.

Most insurance companies offer a discount if a policy is ordered online and that is a benefit that everyone should take advantage of. Discounts can get quite high and while the money saved on one trip travel insurance, for example, may not be a lot, things certainly change if you are looking at an annual insurance policy for the entire family. The money saved can be substantial, so it would be a shame not to look for the best offer and take advantage of the discount.

As previously mentioned, members of different organisations or communities may also have special discounts available just for them, like the policies for International Schools community members and their international schools insurance policies, or expatriates with their expats insurance policies. Since these policies have several advantages over domestic insurance policies, it is always better to get such a policy as opposed to a policy designed for the local population. It is not simply a matter of money, as some may think, as most of the time such insurance policies are not cheaper. It is a matter of benefits provided, and in many cases the portability of the policy from country to country. For example, military personnel looking to get military life insurance or travel insurance have cover that reflects their particular requirements.

Travel insurance policies have cancellation cover for members of HM Forces, in case the trip they were taking was cancelled due to being posted overseas or emergency and unavoidable duty. Just remember that accidents can happen and sometimes there is just no way of preventing them, so it is better to be safe than sorry, so get insured as quickly as possible.

Understanding Life Insurance Basics

To some they do not purchase life insurance until something happens to them which to me are a tragedy in itself. And to some people it is a must. But before you start looking to purchase a policy, you have to understand the types and factors associated with it. You have to understand what is temporary or term and permanent. And under the permanent type of insurance there are other sub types of policies which may offer a better deal for you.

Term life Insurance: It provides a coverage for a specific duration of time or specific number of years for a specified premium. This type of policy coverage does not accumulate cash value. It is commonly referred and considered pure insurance. It is pure type of insuring because the premium buys protection in the event of death and nothing more. Though it will not accumulate any cash value, it is 8 to 10 times cheaper than a permanent life insurance.

Permanent life Insurance: It is a type of coverage or policy that remains in force until the policy matures. This will be in force provided that he owner continue to pay their premium when due. If the owner fails to pay the premium when it is due, the policy expires or policies lapse. Permanent type cannot be canceled by the insurer for any reason except for fraud in the application. This type of insuring yourself builds cash value that reduces the level of risk to the insurer over time.
There are three basic types of permanent insurance namely; universal, whole and what are called endowment.

A universal life insurance is another type of permanent type of insuring yourself that is based on cash value. Universal is intended to provide insurance coverage with greater flexibility in terms of the premium payments and the potential for a higher internal rate of return. The flexibility of this policy allows you to change the amount of insurance as your needs for insurance change. Some of these changes require underwriting approval. The main benefits of a universal type are its flexibility, security and protection for love ones, tax-free death benefit and tax deferred account value growth.

A whole life insurance is a type of insurance whereby the policy remains in force for the policyholders’ whole life. There are seven different types of whole life namely; non-participating, participating, indeterminate premium, economic, limited pay, single premium, and interest sensitive. Whole life insurance is expensive. This type of insurance is like a force savings. You are not only paying for the insurance but for the investment portion of it.

Decades ago, endowment insurance is popular as a saving mechanism and considered to be a good buy. But in today’s world it is being replaced by universal life insurance. It is a type of life insurance where its face value is payable only if the insured survives to the end of the endowment period. Endowment life insurance is rarely use in the last 15 or so years.

Accidental Death Insurance: This is a type of life insurance that is covers exactly what it says. Simply put, it is designed to cover the insured when they die due to an accident.
Understanding and knowing what are the different types of life insurance can empower you more in your search for the right life insurance that you may take out.

Malaises That Make Life Insurance Hard to Get

You might consider that obtaining life insurance is very easy. All you need to do to get an insurance is to fill up a proposal and submit the requisite documentation. The underwriters at the insurance company will do the rest. Alternatively, if you do not want to exert yourself too much, you could consider visiting your insurance advisor. The advisor will give you various options for obtaining life insurance. Most perspicacious insurance advisors will also advise their clients about the pros and cons associated with each policy. Depending on the client’s requirements, the advisor will recommend a life insurance policy. The advisor will submit the proposal to the insurance company, with the relevant documents. However, did you know that not everyone is as lucky when it comes to obtaining life insurance? Several people keep receiving rejections every time they apply. Further, these people do not possess habits injurious to health i.e. smoking or excessive consumption of alcohol either. Neither do they work in hazardous occupations. Despite this, finding life insurance remains an uphill task for them. What makes it worse is that these people need life insurance more than regular human beings.

Certain malaises impact a person’s insurability quotient. The inherent risk posed by these ailments makes insurance companies reject their proposals for insurance. However, the fact remains that these individuals are as normal as anyone else is. While they are not risk-free individuals, their ailments do not restrict them from leading normal lives otherwise. Bipolar disorders are an example of such ailments.

An individual approaches an insurance company and admits to suffering from a bipolar disorder. Insurers have a tendency to believe their voluminous database of statistics. According to these statistics, anyone who suffers from a bipolar disorder will commit suicide. Hence, they do not provide bipolar insurance to anyone having this malaise. However, they overlook the fact that there are two types of bipolar disorders i.e. I and II. Bipolar Disorder I is more serious than Bipolar Disorder II. Anyone suffering from Bipolar Disorder I will pose a higher risk. However, an individual suffering from Bipolar Disorder I can obtain bipolar life insurance. Certain insurance companies will consider providing insurance if the individual can prove that:

• The ailment is well controlled and,
• The individual does not have a history of demonstrating any serious behavioral traits or suicidal tendencies

Bipolar Disorder II is a less volatile disease than Bipolar Disorder I. While the latter can remain a risk throughout life, the former can produce excellent results, if controlled properly.

Another malady that insurance companies avoid is melanoma. These insurers will usually reject any proposal for melanoma life insurance. Usually found on the skin, melanoma can also occur in the eye. Doctors regard it as one of the most malignant forms of skin cancer. The human body comprises certain skin cells that give the skin its colour i.e. melanocytes. By producing melanin, melanocytes protect the deeper layers of the skin from the harmful ultraviolet rays of the sun. In certain cases, the skin could absorb a lot of ultraviolet radiation. This would make the melanocytes produce an excess of melanin. Eventually, the melanocytes will grow abnormally, thereby resulting in cancer. This explains why melanoma life insurance is hard to obtain.

However, this does not mean that no life insurance company provides cover to people suffering from melanoma. If the individual can provide information pertaining to their diagnosis, insurers will reconsider the proposal. Such information includes details like the:

• Age of the individual at the time of diagnosis of melanoma
• Number of years since the diagnosis
• Size of the tumor
• Presence of metastasis
• Presence or evidence of ulceration
• Stage and grade of cancer
• Recurrence of cancer after treatment, if applicable

Based on similar information, insurance companies can provide insurance cover to people suffering from this disease.

At Special Risk Managers (Sydney, NSW), we know that finding life insurance as a high-risk individual is difficult. Yet, such people need life insurance more than “healthy” individuals do. Hence, we set about providing a specialized service aimed at providing insurance to these individuals. An exclusive arrangement with a like-minded international reinsurance company enables us to provide angina insurance, bowel insurance, overweight insurance and murmur insurance. Thus, if you have tried to obtain an insurance everywhere and failed, give us a call at +1300 66 53 56. With us at your side, finding insurance will not be a problem.

International Travel Insurance For Crisis Situations

Globally, people are alert to the risk of travel after the recent Air France disaster and the Swine Flu pandemic.

Air France 447 crashed on May 31 600 miles from Brazil, killing all 228 passengers and crew on board. There will be ongoing investigation to determine the cause. Travelers are not able to stop accidents from happening, but they can be ready for unforeseen events.

The World Health Organization has declared a global flu pandemic. The swine flu (H1N1) virus has spread to 74 countries, after first emerging in Mexico in April. Reports put the figure of affected people at 28,000 globally, with 141 deaths. The swine flu is the first flu pandemic in 40 years. The last flu case in Hong Kong in 1968 killed one million people.

International travel is a fact of life these days. But it doesn’t have to become a nightmare.

Travel insurance can give you the protection of overseas emergency medical insurance. International health travel insurance covers:

o Access to contracted doctors and global health and security services.
o Returning minor children to their family if left unattended because of your illness and treatment
o Medical evacuation to your home country
o Repatriation of remains and personal effects
o Term Life Insurance
o Accidental death and dismemberment
o Reimbursements for delay of travel and loss of luggage
o Reimbursements if you are unable to travel due to sickness or sickness of a family member
o 24 hour emergency hotline services

The great news is that international travel insurance is very inexpensive. With some plans insurance costs as little as $35.00. By purchasing a simple medical evacuation plan for $78 for three months of coverage, a person can add $200,000 of term life coverage for an extra $21; or $400,000 for $64.00.

Good Neighbor Insurance recommends insuring against the unexpected difficulties of international travel. A reliable travel insurance broker can help travelers locate the right plan no matter the length of the trip.