Business Protection Strategies

Key Person Life Insurance

Key Person Life Insurance – protects and reimburses a business from the risk of losing a key person who is critical to the continued profitability of that business. Key advantages of life Insurance often includes the confidence provided to a business’s creditors, stability to potential buyers of a business who seek future continuity, as well as cash value that can be used to fund retirement income and/or a buy-out of a deceased owner’s equity. The insured key person typically is one who is highly paid and possesses skills and experience whose loss would likely cause a severe disruption in areas that may include sales, marketing, operations, and/or crucial relationships that may encompass a broad range of financial, marketing, and operational areas.

Typically, the business:

• Provides notice to the employee of it’s desire to buy life insurance and obtains the employee’s written consent.

• Becomes the owner and beneficiary of the policy.

• Determines the amount of required insurance in one of several ways:

  • The employee’s annual contribution to earnings is multiplied by the expected remaining years of service, and then discounted to its present value.

  • The difference between the employee’s compensation and a replacement person’s salary is multiplied by the number of years required to bring the replacement up to speed, plus any anticipated search and hiring costs for the replacement.

• May not deduct the premiums paid for the life insurance, however the proceeds paid to the business are excluded from federal income tax if proper notice and consent requirements have been met.