An S corporation treats an owner with more than 2% of the stock like a partner for fringe benefits. So when the S corp pays for that owner's life insurance, the cost is included in the owner's W-2 wages, and the usual $50,000 group term life exclusion does not apply: the full cost of the owner's group coverage is taxable. Company-owned policies (key person, buy-sell) work, but the premiums are not deductible, and moving a policy from the corporation to a co-owner can trip the transfer-for-value rule.
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
Who is a 2% shareholder
A more-than-2% shareholder is anyone who owns more than 2% of the S corporation's stock on any day of the tax year, counting stock owned by family members under the attribution rules. In a small business that usually includes the owners, and the family attribution rules can pull in a spouse, children, grandchildren or parents who own stock too. These people are treated as partners, not employees, for most fringe benefits.
Personal coverage paid by the S corp
If the S corporation pays premiums on a policy you own personally (with your family as beneficiary), the payment is compensation. The company includes it in your W-2 wages and deducts it as wages. You are taxed on it. Ask your payroll provider to code it correctly; it should not be booked as a company expense with no W-2 reporting.
The alternative is to treat the payment as a distribution to you. That is not deductible to the company. In a multi-owner S corp, a distribution that is out of proportion to ownership is worth a CPA's attention: the one-class-of-stock rule turns mainly on the corporation's governing documents, so an uneven payment does not automatically create a second class of stock, but it can still have tax and basis consequences. Your CPA should decide whether the payment is wages, a distribution or something else.
Group term life for S corp owners
Employees normally get the first $50,000 of employer-paid group term life free of tax under Section 79. More-than-2% S corp shareholders do not. IRS Publication 15-B says the cost of all of their group-term coverage, including the first $50,000, goes in their wages (W-2 boxes 1, 3 and 5), with no requirement to withhold federal income tax on it. The publication does not spell out how to value that cost, so let your payroll provider handle it. Rank-and-file employees and owners at 2% or less keep the normal exclusion; our imputed income calculator covers them.
Company-owned policies
An S corp can own key person and buy-sell policies on its owners. The usual rules apply: premiums are not deductible (Section 264), the death benefit is generally tax-free if the Section 101(j) consent was signed before issue, and the business files Form 8925 each year.
A few S corp twists to discuss with your CPA:
- Basis: nondeductible premiums reduce shareholders' basis, and tax-exempt death proceeds increase it, allocated by ownership. How the increase is split when an owner dies mid-year can be shaped by a short-year election, which matters for a redemption.
- Connelly: the 2024 Supreme Court decision involved a C corporation, but its logic (company-owned proceeds count toward the company's value without an offset for the redemption obligation) applies to valuing S corp stock too. See After Connelly.
- Second class of stock: ordinary buy-sell agreements generally do not create a second class of stock, but the purchase price terms should be reviewed by counsel.
The transfer-for-value trap
Here is a common scenario. Two S corp owners set up an entity redemption years ago, so the corporation owns a policy on each of them. After Connelly they want to switch to a cross-purchase, where each owner owns the policy on the other. The tempting move, having the corporation transfer each policy to the other owner, is a transfer for value to a co-shareholder. Co-shareholders are not on the list of exceptions in Section 101(a)(2), so the death benefit could become taxable income.
Ways around it that advisors use:
- Transfer each policy to the insured (an exception written into the statute), then buy new cross-purchase coverage.
- Form a partnership or LLC taxed as a partnership among the owners, since a transfer to a partner of the insured, or to a partnership the insured belongs to, is an exception. That is the idea behind the insurance LLC buy-sell.
- Keep the entity redemption and plan around Connelly with your attorney.
Do not move any policy until your attorney or CPA has signed off on the route.
Frequently asked questions
Can my S corp deduct my life insurance premiums?
Only if the premium is treated as wages to you, in which case it is deductible to the company and taxable to you. Premiums on policies the S corp owns and is beneficiary of (key person or buy-sell) are not deductible.
Do 2% shareholders get the $50,000 group term life exclusion?
No. More-than-2% S corporation shareholders are treated like partners, so the full cost of their group term life coverage is included in their wages.
Is a buy-sell agreement a problem for S corp status?
Generally no. Treasury regulations say ordinary buy-sell agreements and redemption agreements are disregarded for the one-class rule unless they are used to get around it and also set a price well above or below fair market value. Have your attorney review the price terms.
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Tell us what the coverage is for and who it would cover. For most requests we ask for each person's date of birth and sex so Erik can prepare for the call. We do not ask health or tobacco questions in this initial request. This is a request for help, not an insurance application or a promise of coverage.
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
- IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits
- 26 U.S. Code 79: group-term life insurance purchased for employees (Cornell LII)
- 26 U.S. Code 264: premiums not deductible when the payer is a beneficiary (Cornell LII)
- 26 U.S. Code 101: certain death benefits (Cornell LII)
- 26 CFR 1.1361-1: S corporation one class of stock rules (Cornell LII)
- Connelly v. United States, No. 23-146 (U.S. June 6, 2024), opinion text (Cornell LII)
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.