If a key person in your company died today, would it adversely affect your business profits? What is the purpose of Key Person Insurance? Key Person Insurance is similar to Property Insurance. Just as equipment and buildings are insured against physical loss, so should key employees or owners. After all, key people are the most important assets of your business.
Who is a Key Person? Focus on people who fit the following criteria:
• They contribute significantly to your business.
• High salary level/ Top sales people
• “Highly visible” employees
• Their death would result in financial strain to your business.
• Decision-making power
• Financiers
• People with special or unique talents
A key person may possess only one or several of these qualities. Tip : No set rules exist for determining how much coverage is needed. Instead, focus on a reasonable and practical amount to handle your business’ needs. Here's how it works:
The business sets a value and then applies for insurance on the key person’s life. The business then pays the premiums and is both owner and beneficiary of the policy. If the key person dies, life insurance death benefits are paid to the business - tax free. The business uses the proceeds to offset losses in sales, productivity, credit and/or replacement cost. e business is the policy owner, premium payor and beneficiary.
The employee has NO rights in the policy. Premium payments are nondeductible and there is no income tax consequence to the insured. Generally, death benefits are received income tax free although some C corporations may face alternative minimum tax exposure.
Additionally, policies are not included in a key employee’s estate unless the employee is the owner of the business. ere are two common types of insurance polices that are used- term life and permanent life. Term life policies are used when the maximum coverage is needed at the most affordable rate. e investment for permanent life is a little more but it allows the company to access the cash value tax free.
Return of Premium policies are gaining popularity because they combine aspects from both term and permanent insurance; the rates are reasonable because the policy itself is a term product, but the policyholder will get back all of the premiums at the end of the term and in some cases begin accessing money in the policy after the 6th year. Key people make little mistakes - a company can absorb little mistakes.
The lack of key person insurance can be a big mistake. Big mistakes quite often absorb a company.
Who is a Key Person? Focus on people who fit the following criteria:
• They contribute significantly to your business.
• High salary level/ Top sales people
• “Highly visible” employees
• Their death would result in financial strain to your business.
• Decision-making power
• Financiers
• People with special or unique talents
A key person may possess only one or several of these qualities. Tip : No set rules exist for determining how much coverage is needed. Instead, focus on a reasonable and practical amount to handle your business’ needs. Here's how it works:
The business sets a value and then applies for insurance on the key person’s life. The business then pays the premiums and is both owner and beneficiary of the policy. If the key person dies, life insurance death benefits are paid to the business - tax free. The business uses the proceeds to offset losses in sales, productivity, credit and/or replacement cost. e business is the policy owner, premium payor and beneficiary.
The employee has NO rights in the policy. Premium payments are nondeductible and there is no income tax consequence to the insured. Generally, death benefits are received income tax free although some C corporations may face alternative minimum tax exposure.
Additionally, policies are not included in a key employee’s estate unless the employee is the owner of the business. ere are two common types of insurance polices that are used- term life and permanent life. Term life policies are used when the maximum coverage is needed at the most affordable rate. e investment for permanent life is a little more but it allows the company to access the cash value tax free.
Return of Premium policies are gaining popularity because they combine aspects from both term and permanent insurance; the rates are reasonable because the policy itself is a term product, but the policyholder will get back all of the premiums at the end of the term and in some cases begin accessing money in the policy after the 6th year. Key people make little mistakes - a company can absorb little mistakes.
The lack of key person insurance can be a big mistake. Big mistakes quite often absorb a company.
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