Everything You Need to Know about Key Person Life Insurance

Life insurance can help protect your loved ones and support them financially even after you’re gone. The same goes for your business. Business life insurance can also protect your business after you die. One of the things you should consider as a business owner is by getting a key person life insurance.

Save Corporation Tax can help you determine why you need to buy this policy for your business.

What is a Key Person Insurance?

Key person insurance is a life insurance policy that is offered to business owners. This policy is designed to provide death benefits when a key employee dies. The business receives the death benefits and is the beneficiary of the policy. The key person refers to the owner, partner or key employee wherein the business operations depend on.

To simplify, key person life insurance is life insurance on the key person in the business. For small businesses, the key person is often the business owner. Remember, the key person or persons are the individuals that are crucial to the business and in their absence, the business may suffer. Business owners should consider purchasing life insurance for these key persons.

How Does it Work?

When a company buys life insurance on its key employees, they pay the premiums and receives the death benefits of the policy. In case a key person dies, the company becomes the beneficiary. Why should you get coverage?

It is crucial to get coverage for the key person because when you lose an owner, partner or key employee, it may also mean the death of the company. The objective of this policy is to protect the company from the negative impact of losing the key person who is responsible for making the business work.

Once the company receives the death benefits, they use the payouts to cover business expenses. This may include bills, debts, investors, and wages among many others. In the worst-case scenario, key person insurance offers a buffer, option or solution to a company to prevent it from going bankrupt.

The structure of your policy may depend on the legal structure of your business. The company pays premiums of the key person insurance policy, owns it and is the beneficiary. In exchange, the key person should provide written consent to the company who owns the policy.

How to Identify Who Needs this Policy

If your company is based on a sole proprietorship or if you don’t have any employees, then you don’t need to get a key person life insurance. On the other hand, if you have other people relying on you in the business such as a partner or employees, you should consider purchasing key person life insurance.

Start by evaluating your business and identifying the people who are irreplaceable in your company. The most obvious choice for small business is the owner who usually manages everything in the company including the books, operations, and customers. If you die, the business may suffer from your absence.

How Much Coverage Do You Need?

The coverage you need depends on the type of business you have. However, it all boils down to how much insurance you can afford. Pick a policy that will fit your budget and can provide short-term cash to address immediate needs.

The cost of this policy depends on the nature and size of the business including the health, age, and sex of the key person. You should also consider the type of policy you are buying which includes permanent or term insurance.

Ultimately, there is no specific formula to determine the cash value of the insurance policy. identify the financial impact on your company when the key employee’s die. If you are buying a policy for yourself, you should get enough coverage to support the heirs of your business as well as debts incurred by your business.

On the other hand, if you are running a bigger company, the coverage should be enough to replace the key employee’s sales profit so it can act as a cushion while you look for a replacement. To know more about this, visit Save Corporation Tax.

How Much Does It Cost?

The cost of purchasing key person life insurance depends on various factors including the following.

• Type of policy — Life insurance policies has varying costs. Each have different risks, costs, and benefits.
• Death benefit — The higher the amount of coverage, the higher the premiums will become.
• Key person’s health and lifestyle — A key employee’s age, health condition, occupation, and history are some of the factors that can help determine the level of risk. In exchange, it can affect the premiums paid.

As a reminder, if you’re getting an older person insured or if that person is less healthy, the cost of buying key person life insurance can be more expensive. In some cases, you may need to look for other options to provide compensation in case your key employee dies.

Categories of Loss Covered by the Policy

• Any loss incurred when a key person is disabled and unable to work but haven’t died.
• The insurance policy is designed to protect the interests of the partner. This insurance enables the partners’ interests to be bought by existing partners.
• The insurance policy protects profits such as compensating lost income from sales and losses due to any delay or cancellation of business projects which involves a key person.
• The Insurance policy guarantees business loans. The insurance coverage value should equal the guaranteed value.

Is Key Person Insurance Tax Deductible?

The premiums you pay for key person life insurance are not considered a deductible expense on your company’s income taxes. On the other hand, the death benefits your business receives are tax-free. To understand better, consult a tax professional to help determine how key person insurance will affect your business taxes.

Simply put, key person life insurance is non-tax deductible. The premiums should be paid with after-tax dollars. The company can deduct the premiums if they are part of the key employee’s taxable income. On the other hand, if the owner dies, the key person’s death benefit will be paid to the company free of income tax.

For Employees

If you are the sole owner of your company and beneficiary of the key life insurance policy, there are no tax implications for the key employee. The premiums aren’t part of the taxable income unless they have ownership. What you can do is transfer the ownership of the insured to the employee. On the other hand, the policy may be liable to pay taxes where the transfer is considered a form of compensation.

For Companies

There is an exception such as a C corporation wherein the death benefit will be included in alternative minimum tax due. If the company decides to sell the policy, you’ll need to pay taxes depending on the cash value of the key person life insurance policy as well as the premiums.

The company needs to include coverage with corporate tax return details which include the employees insured, amount of coverage, and if each key employee has a written permission for the insurance policy. Make sure you consult with a professional tax company and that you have all the necessary requirements.

Buying Key Person Insurance for Your Company

In most cases, key person life insurance is often required if your company is applying for an investment or loan. Most banks require the company to have key man life insurance, especially since most small businesses are dependent on one or two employees including the owners. If your company is raising funds, investors are also looking for assurance in case you lose a key person, the company will not go bankrupt.

In addition, this policy will also serve as financial protection for your company. It protects your business from income loss. Losing a key employee can have a huge negative impact on your company, especially when the key person’s name is tied to your businesses’ brand. In other cases, the person is also tied to a certain project and the loss can lead to the drop of your current or new business.

The loss of a key employee can affect the credit of your company and therefore, this policy prevents the business from going down. Hence, this policy becomes an alternative. Key person life insurance also can also be part of an employee’s benefit package to help attract employees because the policy may be transferred to the person insured.

Another reason to purchase this policy is if your company has plans on going public or into a merger. You need to get coverage for your board members before your company can proceed with the IPO or merger.

Bottomline

Your business may need key person life insurance if your company depends on one or more employees who have certain skills that you cannot easily replace. At the same time, your business relies on that person to generate income. This policy is also useful in case your company has left some debt and the death of the key person will make it difficult to settle.

Get in touch with Save Corporation Tax to know more about key person insurance.