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Key Person Life Insurance

Defined as a high-value employee who does not own the business, a key person can be an irreplaceable part of an organization.

Key person life insurance can protect a business against income loss arising from the death, injury or serious illness of one of your critical employees.

The business should be the owner and beneficiary of a key employee life insurance policy. In most cases, premiums are nondeductible, and death benefits are received tax-free. The business receives the life insurance death benefit as compensation for the income loss and/or increase in expenses resulting from the key employee’s death.

If the insured key person survives to retirement, the company can use the cash surrender value to fund a retirement benefit or transfer the policy to the key person at retirement.

Who Needs Key Person Life Insurance?

Though key person insurance can be taken out on virtually any full-time employee, the decision to purchase a policy is typically contingent on an individual holding partnership interests or occupying a mission-critical role in the organization.

If losing an employee would put your organization in a tough spot, key person, also known as key man, insurance is a wise investment.

Here are some scenarios in which purchasing this life insurance makes sense:

  • Your company’s reputation or financial sustainability depends on an employee’s name, reputation or skillset.
  • Your company is undercapitalized and needs collateral to satisfy business loan requirements for a bank or other creditor.
  • Your company is structured as a partnership, and you want the ability to buy out your partner’s shares if the partner passes away.
  • An employee stands out as a primary generator of revenue (i.e., director of business development).

This list is far from exhaustive. There are many other reasons for which your business may want to explore this avenue.

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