Andrew Carnegie once stated, "Take away my factories, my plant's. Take away my railroads, my ships, my transportation. Take away my money; strip me of all these; but leave me my people and in two or three years I will have them all again." What corporate purpose could be considered more essential then key person insurance. The business that insures its buildings and machinery and automobiles from every possible hazard can hardly be expected to excersize less care in protecting itself against the loss of two of its most vital assets-managerial skills and experience." U,S Court of Appeals, the Emel Co.,Inc. V Commisioner. 189 F2d 230 "1951, CA-3"

The death of a key person will often have a devastating effect upon the future of a business. To protect against this sudden loss, many businesses purchase life insurance policies on certain key employees. Although the premiums are not deductible, the proceeds at date of death are recieved income tax free by the company. However, proceeds are included in "adjusted current earnings" to the extent that they exced the policy's tax basis, for the purposes of the Corporate Alternative Minimum Tax.

These proceeds can fill several needs:

A. Assist in finding and training a new employee to replace the deceased key person.
B. Fulfill any contractual agreement to continue the employee's salary to his or her family for a certain number of months.
C. Provide the funds to purchase stock belonging to the deceased shareholder.
D. Bolster the company's credit standing.

Also, policies can be purchased on major creditors of the company, whose death might make the debt uncollectable by the company.

This document was last modified on July 15, 1999

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