CREATING TIME FOR TRANSITION
Understanding Key Person Insurance
Key person insurance is life insurance that covers the key person or people in a business who are crucial to the company’s success. With this kind of insurance, the company pays the premiums and is the beneficiary of the policy. If something happens to that person, the company receives the insurance payoff. The purpose of key person insurance is to help the company survive the blow of losing the person who makes the business work.
The loss of key people can potentially cripple an otherwise successful business. Key Person Insurance protects the company financially during this time, allowing the business to weather the storm.
The lifeblood of most businesses courses through the hearts of its people.
Most businesses rely heavily on a few key people. Whether it is a front-line supervisor that runs the crews, a senior leader for slightly larger business, or the founder and owner of a company, the loss of key people can potentially cripple both its short-term and long-term viability.
Key Person Insurance is a risk management tool that helps to cover the loss of a valued contributor due to death or disability.
What you need to know
Unlike most insurance policies, the beneficiary of Key Person Insurance is not the employee’s family, but rather the business itself. Any plan to implement a key person insurance program should also complement plans that take care of the employees’ families.
To insure the life of a Key Person, term or permanent insurance can be used. Under these plans the premiums are not tax-deductible. However, the proceeds are received tax-free and can be used to pay for obligations that might be difficult to meet after the loss of a key person. This could include recruiting a replacement, paying bills, restructuring, etc.
In almost all cases, personal insurance should be paid with personal funds, and policies where the business is the beneficiary should be paid using corporate dollars.
For key person disability insurance, there is typically a time limit to how long disability benefits will be paid — typically one year or less. Since the policy was established to assist the business in the short-term, the benefits are short-term as well.
The minimum length of the disability before benefits are paid affects the premium in both cases, usually 60 or 90 days.
The Bottom Line
There can be unique features of this type of insurance; future insurability, waiver of premium and return-of-premium riders to complicate matters. We recommend that an Advisor with specialized experience in Key Person Insurance be engaged.
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