The business cannot deduct the premiums it pays for these policies, but upon the employee’s death, the proceeds of the life insurance policy are income tax- free to the company. And the proceeds from a key person disability insurance policy would also be income-tax-free.

In the event of a claim due to death or disability, the company is the beneficiary of the proceeds of the insurance policy. The company then receives the needed funds to meet financial obligations and to hire and train a replacement for the key employee.

Key Person Insurance
Learn about key person insurance
Learn how key person insurance works