What is Key Person Insurance and how does it work?
Every now and again, there are people in many industries who can be considered a “key person” to a business. They may have risen up the ranks in a company or developed their own business, making them a CEO or President. Key people may come in all different varieties throughout the working world but there is insurance that can help protect a business if something happens to them.
What is Key Person Insurance?
Here’s an easy to follow definition: Key person (also called Key man) insurance protects a company’s core employees with an insurance policy pays the company to help replace the key people (or person) if they are no longer living or become disabled and cannot work anymore.
Different Policies within this insurance product:
Term life insurance (Key person)
Term life insurance is the most popular and affordable form of life insurance. Similar to auto or home insurance, you pay a premium on a monthly or annual term life insurance policy, and you’re covered if the insured dies at any time during the term. Typically, you can buy life insurance that has a term of up to 35 years and can be renewed when the policy expires. Key Man Lifetime Insurance
Whole life insurance (Key Person)
Also known as permanent life insurance and has no expiration date. The policy remains in effect as long as you pay the premium. Whole life insurance is more expensive than term insurance, but your premiums are paid into a savings account. The policy thus captures the cash value that you can borrow or withdraw.
Variable life insurance (Key Person)
This is similar to whole life insurance because the coverage remains in effect as long as you pay the premium. The difference is that the bonus is placed in an investment account, not a savings account. Investments can depreciate unpredictably in anticipation of market ups and downs, so a policy change can be risky.
Disability insurance
You can also add a disability component to your key person coverage. According to the Insurance Information Institute, an insurance company will pay benefits – typically 40% to 70% of a key employee’s salary – if the insured has a disability that prevents them from performing their job responsibilities. .
Where can it be used?
In the news, we often hear of multi-billion dollar companies losing their CEO or unmatched executive(s). Chances are that these companies have key person insurance to help ensure there is a proper replacement lined up who can keep that ship afloat fast.
Any companies that rely on one person’s expertise, performance, or personal network to generate revenue should consider key person insurance. If you work in an industry where employees have more generalized skill sets, however, this type of business insurance is unlikely to be required.
Key people in your business, in addition to the owner, may include those who:
- Have highly specialized technical knowledge or industry expertise.
- Have cross-industry knowledge and training to help your business grow vertically or horizontally
- Have connections to help aid with media/advertising endeavors of a company
- Desires to learn everything one’s company can offer to help assist the owner/CEO/executive board
- Can uniquely connect people together and form business partnerships that may have been out of the realm of possibility.
The goal of key person insurance is to help a small business stay afloat financially if an owner or key employee dies or becomes disabled. Key person insurance on a company’s management team is frequently required by investors and lenders.
In situations where you don’t have a key member of your team, key person insurance can be used. In a small-business partnership, for example, key person insurance can be used to buy out the shares of former partners.
While death or disability of a key employee is covered by key person insurance, if that person leaves the company for any reason, you can cancel the policy or transfer it to the insured. That policy can be customized to their specific needs and begin paying the premiums.
The proceeds from key person insurance can be used for any of the following by businesses:
- Covering operating costs until a replacement hire can be found.
- The replacement hire will be trained.
- Making up for lost income.
- Purchasing a former owner’s share of the company’s ownership. (If you plan to use key person insurance for this purpose, you should also have a buy-sell agreement.)
If you decide to close the business, the proceeds from key person insurance can be used to pay off the debt, distribute funds to investors, and pay out severance to employees who require it, or fully wind down the business.
How much can Key Person insurance cost?
You will need to purchase a separate key personnel insurance policy for each of your key employees. The amount you pay for each will depend on:
- Age, sex and physical health of the insured. (Insurers may require the insured to pass an exam before issuing an insurance policy.)
- Occupation and occupation of the insured.
- Total amount of the insured’s indemnity.
- The amount of coverage your business needs.
Is Key Person Insurance tax deductible?
Knowing what is and what is not tax deductible is always a good thing in the business world. The IRS generally doesn’t allow businesses to deduct life and disability insurance premiums for key people. However, key person insurance proceeds are tax-free as long as you get the key person’s consent before purchasing a policy and filing Form 8925 with the IRS.
Where Can I go to shop a Key Person Insurance plan?
Not to sound like we’re bragging but Harris Insurance can definitely help you with this type of insurance product. We offer insurance in so many markets with companies from all over the country. It would be our pleasure to provide you with peace of mind when it comes to shopping and purchasing insurance.
Always remember that we are here to help answer any questions you may have when it comes to all things insurance!
Drop us a line at service@harrisinsurance.com or call us at 850.244.2111
LEGAL DISCLAIMER
Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.
