Can My LLC Pay for My Life Insurance?

An LLC can pay for life insurance, but tax implications and structuring depend on the policy’s purpose and design. The Internal Revenue Service (IRS) views life insurance paid by a business differently based on who benefits from the policy and how it is integrated into the company’s operations. Understanding these distinctions is important for compliance and to ensure the policy serves its intended financial purpose for both the LLC and its members or employees.

Types of Life Insurance Policies

LLCs use life insurance for various purposes. Group Term Life Insurance (GTLI) is a common employee benefit, providing coverage to a group of employees.

Key Person Life Insurance protects the business from the financial impact of losing a vital individual, such as a founder or an executive. In this arrangement, the LLC is both the owner and the beneficiary of the policy. The policy pays a death benefit to the LLC if the insured key person passes away.

Life insurance can also be provided by an LLC as a form of compensation or bonus to an owner or employee. The LLC pays the premiums on an individual life insurance policy. The policy is usually owned by the individual, and their chosen beneficiaries receive the death benefit.

Tax Considerations for Premiums

The tax treatment of life insurance premiums paid by an LLC varies depending on the policy type and beneficiary designation. Premiums for key person life insurance, where the LLC is the beneficiary, are not tax-deductible for the LLC. This is because the LLC receives the death benefit, which is tax-free, and the IRS does not allow a deduction for expenses related to tax-exempt income.

For Group Term Life Insurance (GTLI), premiums paid by the LLC are tax-deductible as an ordinary and necessary business expense. However, the cost of GTLI coverage exceeding $50,000 provided to an employee is considered imputed income to the employee and must be included in their taxable wages, subject to Social Security and Medicare taxes.

When an LLC pays premiums for an individual life insurance policy as compensation, these payments are deductible for the LLC as compensation expense. The premiums paid by the LLC for such policies are considered taxable income to the individual owner or employee.

Tax Considerations for Death Benefits

The tax treatment of death benefits received from life insurance policies involving an LLC also depends on the policy’s structure and the designated beneficiary. When an LLC is the beneficiary of a key person life insurance policy, the death benefits received are income tax-free to the LLC. This tax-free receipt helps the business cover costs associated with the loss of the key individual.

Death benefits paid directly to individual beneficiaries, such as from a group term life insurance policy or an individual policy provided as compensation, are income tax-free to the recipient. This tax exclusion applies when the benefits are received as a lump sum. However, if a beneficiary chooses to receive the death benefit in installments, any interest earned on the unpaid balance is taxable income.

Life insurance proceeds can become subject to estate taxes if the policy is included in the deceased’s taxable estate and the estate’s value exceeds the federal estate tax exemption amount. This can occur if the estate is named as the beneficiary or if the deceased retained certain ownership rights over the policy.

Policy Ownership and Beneficiary Designations

The decisions regarding who owns a life insurance policy and who is designated as the beneficiary are important for both control and tax outcomes. If the LLC owns the policy, it has control over the policy’s cash value, if any, and can make decisions about loans or withdrawals. When the LLC is both the owner and beneficiary, this signifies a key person policy, where the proceeds are intended to benefit the business directly.

Conversely, if an individual owner or employee owns the policy, even if the LLC pays the premiums, the individual controls the policy and its benefits. This arrangement is common when life insurance is offered as a compensation benefit, allowing the individual to name personal beneficiaries. The choice of ownership affects whether the policy’s cash value is considered a business asset or a personal asset.

Naming the correct beneficiary is essential to align with the policy’s purpose and avoid unintended tax consequences. Designating the LLC as the beneficiary directs the death benefit to the business, which is typical for key person coverage. Naming individual family members as beneficiaries ensures the proceeds go directly to them, usually tax-free, which is the goal of most personal and employee benefit policies. Careful coordination of ownership and beneficiary designations helps ensure that the life insurance serves its intended purpose without unexpected tax liabilities.