How Does Key Person Life Insurance Protect My Business?

As a small business owner, you may employ at least one individual who is essential to your company’s success. This person may be a partner or have a unique expertise that is unmatched throughout the rest of the company. If this person’s exit from the company is planned, such as retirement or voluntary termination, then you can prepare for the loss and take the necessary precautions to minimize the impact. However, if the departure is unplanned due to an unexpected death, disabling accident or a sudden quitting, then the company is exposed to financial risks.

If you employ individuals who are vital to your company’s success, especially if your business is small, consider key person life insurance. This insurance solution can protect your organization’s solvency in the event that you lose the key person without warning, and also the investments made by lenders and investors to your company.

How Does Key Person Life Insurance Protect My Company?

• You purchase life insurance on the key individual(s).
• You are the beneficiary of the life insurance policy, and apply for and own the policy. If the key employee dies prematurely, the policy pays out to you.
• Tax-free dollars from the policy can be put towards finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.
• Policy can be transferred to a departing key employee as a retirement benefit or to a different key individual, upon the retirement of the original key employee.
• Can be used to buy out the key employee’s shares or interest in the company.
• Premiums are based on several factors, including the key employee’s age, physical conditions and health history. The amount of coverage also affects the premium.

Advantages of Key Person Life Insurance

The following are just a few of the advantages of key person life insurance:

• It can be easily implemented and does not require Internal Revenue Service (IRS) approval; only requires an annual report to the IRS.
• Life insurance benefits are paid to the company tax-free.
• Customers, creditors, lenders and stockholders have the assurance that the business has a continuation plan and coverage in place.
• There is flexibility in what the funds can be used for.