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 The beneficiary of a life insurance policy can
generally receive the policy proceeds free of federal income taxes.
Now, the Pension Protection Act of 2006 (PPA) has changed the rules
regarding employer-owned life insurance.
New approach. Under PPA, employers will have to report — as ordinary income — life insurance proceeds received from policies issued after August 17, 2006, except to the extent of the amount paid in premiums. But there are ways that employers can retain income-tax free status for insurance proceeds under certain circumstances. New requirements. First of all, the employer must meet certain "notice and consent" requirements. Essentially, before a policy can be issued on an employee, that employee must be notified in writing that the employer intends to insure the employee's life. The employee must provide written consent to being insured, and the employee must also be informed that the employer/policyholder will be named a beneficiary of any death benefit. There is also an IRS filing requirement. When proceeds won't be taxed. Assuming all requirements are met, policy proceeds will not be taxed if: The insured was an employee at any time during the 12-month period before death; The insured was a director or "highly compensated employee or individual" at the time the coverage was issued; The employer uses the benefits to buy shares (or a capital or profits interest) in the company from a member of the insured's family, an individual designated beneficiary (other than the employer), a trust established for the family member or beneficiary, or the insured's estate; or, The proceeds are paid to the family member, beneficiary, trust, or estate. |
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