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Keyman Life Insurance
Key man life insurance, often term life insurance, is designed
to protect the business if a key employee dies unexpectedly.
To secure key man insurance, the business must apply for
a life insurance policy on the life of the key person. Once
secured, the business is the premium payer, policy owner
and beneficiary. In the event that the key employee dies,
the proceeds of the policy are paid to the business, usually
tax free. The business can use the proceeds at its own discretion
but the primary use of fund is to hire a capable replacement.
Keyman Disability Insurance
Keyman disability insurance is designed to protect the company
or business in the event that a key employee is disabled
through injury or illness. The process of obtaining key man
disability insurance is similar to the key man life application
process. The policy is owned and paid by the business and
the business is the beneficiary if the key person becomes
disabled. When a claim takes place, after a brief waiting
period, the policy will pay a predetermined monthly benefit
for as long as the key employee is disabled or until the
policy term expires. The monthly income received from the
policy can be used to fund ordinary expenses or to secure
and train a replacement for the disabled key employee.
Business Continuation Planning using Key Person Insurance
Business succession or business continuation planning attempts
to avoid potential problems that may arise if a business
owner, partner or shareholder dies or is disabled. Either
event will cause a significant strain to the future ability
of any business. Some of the concerns in business continuation
planning include:
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What are the goals of
the business owner’s and how will the company continue
operations? |
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Where will the funds come from to
buy out the deceased owner’s family? |
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If disability occurs, how will the
business continue to provide income to the disabled owner? |
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How can an owner retire and receive
fair market value for his interest without affecting
the operations of the company? |
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Will the business have to be sold
to pay estate taxes? |
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Can the firm continue successfully
with the addition of the deceased owner’s heirs
as new owners? |
The answers to these questions will determine the strategy
to implement to protect the company and business owners if
there is sudden death or disability. In many cases, key man
insurance is an ideal solution to many of the problems with
business continuation planning. Both key man life and disability
insurance can be acquired on the lives of the business owner
so if the unfortunate occurs liquid funds would immediately
be available. For specific details on business continuation
planning see, “What
is Business Continuation Planning?”
Executive Benefits and Key Employee Compensation
The more success a company attains, the more important it
becomes to take care of key employees who are responsible
for the company’s success. Rewarding these key employees
becomes crucial if the business is going to retain its talented
people. If key employees are not rewarded, they may feel
underappreciated and begin to consider other employment or
business alternatives. An executive benefit or employee compensation
agreement can be implemented to assure that these key executives
receive their proper financial incentives. With many executive
compensation arrangements, the advantages of life insurance
make life policies an ideal vehicle to provide these benefits.
For more specific information on executive benefits and key
employee compensation see “Key Executive Compensation
Strategies Using Life Insurance”.
Other important key person insurance articles:
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