Many companies buy what is called “key-man” life insurance on
particularly key employees, where the company is the beneficiary. This
only makes sense because if a company loses a critical executive due to
death, the company gets monetarily rewarded with the life insurance
proceeds upon the death of the key employee.
The insurance
premiums paid by the company each year are not tax deductible, for
federal income tax purposes, and then the life insurance proceeds the
company receives upon the employee’s death is tax exempt, for federal
income tax purposes.
Each year, the company records on its books
the increase in the cash surrender value of the life insurance policy as
a long-term asset on its balance sheet, and with a like amount an
increase in earnings on its income statement. This increase in cash
surrender value each year is not taxable income.
Here’s the
problem. Some smooth financial operators have seen the financial
advantage of buying key-man life insurance on any employee of a company
since just the tax benefits alone make the insurance policy quite
advantageous to the company.
And to pile on, many of these life insurance policies are continued even after employees have left the company.
Clearly,
buying life insurance policies for just regular employees of the
company (thus the phrase Janitors’ Insurance or Peasants’ Insurance) is
flat out abuse of the tax law.
Thus, my recommendation would be
to just allow this favorable tax treatment to be on the life insurance
policies on truly key employees…such as the Corporate Executive
Management Team. Thus I recommend that there be no new Janitors’
Insurance policies allowed in the future.
The tricky part is what to do with all of the many present Janitors’ Insurance policies out there now?
I
recommend that if the company decides to continue to keep this
insurance coverage until the person dies, then fine, but the life
insurance proceeds upon death gets reflected to the company as ordinary
taxable income, for federal income tax purposes.
But then I would
lessen the economic blow here by giving the company an incentive to
cash in these life insurance policies now. I would let them cash them
in during 2013 for their cash surrender value, and then the cash
proceeds received by the company would be taxed as ordinary income at a
favorable federal income tax rate of perhaps something like 25%.
The
point here is that the country would be a lot better off if all of
these Janitors’ Insurance policies are cashed in by companies for their
cash surrender values as soon as possible.
And then to give
even more of an incentive for companies to cash them in now, I would
raise the federal income tax rate on the cash surrender value by say 2%
per year, up until the top statutory income tax rate is reached, for each additional year the insurance policy is retained by
the company.
The tax proceeds received by the US government from this recommendation should be used to reduce the US Debt.
