Key Person Insurance
Overview
Key Person Insurance is a life insurance policy that a business purchases on the life of a key employee to help the company survive financially if something happens to the employee. The key person policy can either be term insurance or permanent insurance.
While the main purpose of Key Person Insurance is to provide a death benefit to the business in the event of the premature death of an essential employee, it can also be used as a way to provide the key person with supplemental non-qualified retirement benefits.
Life insurance is the one financial instrument that provides the necessary funds at precisely the time they are needed most. While it may not be possible to completely replace the contributions the employee made to the business, insurance coverage can help ensure that the business will have the funds to:
• Stay in business
• Assure creditors that everything is fine
• Assure customers that the business will continue to operate as usual
• Cover the expense of finding and training a suitable replacement
How does this work?
The business buys a life insurance policy on the life of the key person. The business is the owner and beneficiary of the policy. The business pays the entire premium and will receive the entire death benefit. The key person does not have any interest in the policy, nor does his/her
family typically receive any benefit from it when death occurs.
Who Is A Key Person?
Business owner
Sales representative
High level manager or more....
Advantages to business owner
• The employer receives needed funds which can be used to help meet financial obligations and train a replacement if the key employee dies.
• While the policy is in force and the employee is alive, the cash value of a permanent policy is available for use in a variety of ways ( keep in mind that withdrawals and loans will affect policy values and death benefits and may have tax consequences).
•For policies issued after August 17,2006, the death proceeds may be exempt if the Notice and Consent requirements of IRC Sec. 101(j) have been met.