INQUIRY:

Is Keyman insurance unallowable?

 

RESPONSE: This question has been asked of me several times recently, even by larger firms.  My response:  It Depends! 

FAR 31.205-19(e)(v) states - "Costs of insurance on the lives of officers, partners, proprietors, [Typically those considered as the Key man or to be politically correct Key Person], or employees are allowable only to the extent that the insurance represents additional compensation"  (FAR 31.205-6 provides more detail on Compensation). 

 Typically,  the Key Person of a company does not have to pay for the insurance and it IS NOT added as additional compensation to them.  This is so they, nor the company, have to pay taxes on the Key Person insurance.  Therefore, in this case, it would not be allowable according to FAR 31.205-19(e)(v). 

Alternately, if the cost of the Key Person insurance IS added as additional compensation, then it would be allowable according to this same clause.