Section 101(j) of the tax code says that when a business owns a life policy on an employee (owners included) and is the beneficiary, the death benefit above the premiums paid is taxable income unless two things are true: the employee got written notice and gave written consent before the policy was issued, and an exception applies, most often that the insured was a director or highly compensated employee when the policy was issued, or was employed within 12 months of death. The business must also file Form 8925 every year.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
Why this rule exists
Before 2006, some large companies bought life insurance on thousands of rank-and-file employees, often without telling them, and collected tax-free death benefits years after those employees had left. Congress responded in the Pension Protection Act of 2006 by adding Section 101(j). It applies to employer-owned life insurance contracts issued after August 17, 2006, and to older contracts that were materially changed after that date.
The rule was aimed at big corporations, but it catches small businesses constantly. Any time a business owns a policy on someone who works for it and the business is the beneficiary, 101(j) applies. That includes key person policies, entity-owned buy-sell policies, and policies an LLC owns on its own members.
The three notice-and-consent requirements
All three must be satisfied before the policy is issued. A consent signed after issue does not count.
- Written notice that the employer intends to insure the employee's life, including the maximum face amount the employer might buy.
- Written consent from the employee to being insured, including consent to coverage continuing after employment ends.
- Written notice that the employer will be a beneficiary of the death proceeds.
In practice this is a one or two page form. Many carriers have their own version, and your attorney may prefer a custom one. Write the maximum face amount with some room (for example, "up to $2,000,000") so a later increase does not need a new consent.
The exceptions (you still need the consent)
Notice and consent alone are not enough. One of these must also be true:
| Exception | What it means |
|---|---|
| Recent employee | The insured was an employee at any time during the 12 months before death. |
| Director or highly compensated | When the policy was issued, the insured was a director, a highly compensated employee under the Section 414(q) rules, or among the highest paid 35% of employees under Section 105(h) rules (as modified by 101(j)). |
| Paid to the family | The proceeds are paid to the insured's family member, designated beneficiary (other than the employer), trust or estate. |
| Buys their interest | The proceeds are used to buy an equity interest in the business from the insured's family, beneficiary, trust or estate, as in a buy-sell. |
Owners and key people often fit the highly compensated exception. The 12-month and buy-sell exceptions add backup. That is why the consent form is the piece that matters: without it, no exception can save the payout.
A company paid $40,000 in total premiums on a $1,000,000 key person policy and never collected a consent. When the insured dies, roughly $960,000 (the death benefit minus premiums paid) becomes taxable income to the business. At a 21% corporate rate that is about $200,000 of tax on money that was supposed to rescue the company.
Annual reporting: Form 8925
Section 6039I requires every business that owns employer-owned life insurance to file Form 8925 with its tax return each year. It reports the number of employees, how many are insured, the total coverage in force, and whether the business has a valid consent for each insured. Many small businesses have never filed it. If yours owns a policy on an owner or employee, tell your CPA.
If you already missed it
There is no formal IRS correction program for a missed consent. Options to discuss with your CPA and attorney include:
- Replace the policy with a new one after getting a proper consent, if the insured is still insurable at a reasonable price.
- Change the beneficiary so proceeds go to the insured's family or are used for a buy-sell, which may fit an exception, but only if the consent was in place.
- Exchange or restructure, keeping in mind that a material change can create a new contract for 101(j) purposes.
The real fix is process: put the consent form in front of the insured at application, alongside the carrier paperwork. We do that on every business case.
Free checklist: 101(j) notice and consent preparation checklist (PDF). It is a checklist, not the consent form itself; the carrier or your attorney supplies that.
Frequently asked questions
Does 101(j) apply to a one-owner business insuring the owner?
If the business owns the policy, is the beneficiary, and the owner works for the business, it is employer-owned life insurance, so yes. A single-member LLC taxed as a disregarded entity is a gray area that your CPA should weigh in on; the safe move is to sign the consent anyway.
Does 101(j) apply to a cross-purchase buy-sell?
No, not when the owners personally own the policies on each other, because the business is not the policyholder. It does apply when the business owns the policies (entity redemption) and typically when an insurance LLC owns them, so get the consents in those structures.
Can the consent be signed after the policy is issued?
No. The statute requires notice and consent before the contract is issued. A consent signed afterward does not satisfy 101(j).
Do we have to file Form 8925 even if we followed the rules?
Yes. Form 8925 is required every year for each tax year the business owns employer-owned life insurance contracts issued after August 17, 2006, whether or not anyone has died.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.