Why Buy Key Person Insurance?

Business Owners and corporations buy key man insurance to protect their company from the potential issues that may arise from the death or disability of a key person. Building a successful business takes many years and considerable effort and to lose years of hard work and substantial investment for failing to plan is not a sound business practice.

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Key Man Insurance- A Simple Business Protection

Key man insurance is a simple solution to a potential catastrophic problem. It is an inexpensive tool to protect a corporation or other business entity from the damaging effects of the loss of a key employee or business owner. It is also a logical way to insure that a business can retain options if a key employee dies or is disabled. The options provided by key man insurance may include hiring and training a replacement employee, paying the businesses debt and liquidating the company, or selling the company at fair market value. Without key man insurance in place, most businesses have no option other than to close the business or sell it to a competitor at a significantly reduced “fire sale” price. There is no reason to postpone planning for this potential crisis. The relatively low costs to acquire key man protection make purchasing this insurance an easy decision.

For more information, also see “What is Key Man insurance” or
“Who needs Key Man Insurance?”

Retain Key Employees with Key Executive Life Insurance

One use of key man insurance is to protect the company from the loss of a key employee due to death or disability but just as important to any business is retaining their key people. Most small to medium size companies have key employees that generate large percentages of revenue annually. Losing one of these key contributors to a competitor can potentially be devastating. Key man insurance can be purchased as a benefit for the employee while at the same time providing some security to the company essentially tying the executive’s benefits to continued service. Life insurance policies can be purchased on key employees for the mutual benefit of the company and the employee. Some plan options include executive benefit plans and nonqualified deferred compensation arrangements. For more details on using key man insurance to retain key executives see, Executive Compensation Strategies.

Key Person Insurance Advantages

Included below are just a few of the many advantages of key person insurance:

1. Affordability. Both key man life and disability insurances are inexpensive. In fact, key man life can be funded with inexpensive term insurance.
2. Key employee insurance policies are easy to acquire and do not require any special filings or IRS disclosures.
3. Peace of mind to business owners and investors/creditors alike.

4. The business has the choice of which employees to insure.
5. Proceeds of keyman life and disability are generally received by the business tax free¹.
6. The business has the option of using universal life insurance to fund key executive compensation plans. These permanent policies build cash value that may be used, if needed, by the business.

Uses for Key Man insurance

The primary uses for key man insurance include:

1. Providing funds for recruiting and training a replacement key employee.
2. Paying any expenses or bills while the company stabilizes.
3. Securing loans for business growth and expansion.
4. Strengthening the company’s credit position.
5. Purchasing stock from the deceased owner’s estate.
6. Salary continuation arrangements to surviving spouse.
7. Executive compensation planning.
8. Transitioning the company to successor owners.

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¹ Life insurance death proceeds may be subject to the corporate Alternative Minimum Tax (AMT).