How To Avoid Avoid Tax Traps In Life Insurance

Beware that an employer-owned life insurance contract might not qualify for the usual exclusion from regular income tax. An "employer-owned life insurance contract" (a term that applied to much more than one would think) does not receive the exclusion unless certain notice and consent requirements are met.

An "employer-owned life insurance contract" is a life insurance contract that:

1. Is owned by a person engaged in a trade or business and under which such person (or certain related party) is directly or indirectly a beneficiary under the contract, and
2. Covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued. An "applicable policyholder" means, with respect to any employer-owned life insurance contract, the person described in the preceding sentence who owns the contract at the time it is issued.