[Editor’s note: content updated on September 26, 2018]
As a business owner, you may be aware that a term life insurance policy can do more than just protect your immediate family should the unexpected happen to you.
Your start-up or established business can also use an affordable term life insurance policy as part of your business continuity planning to shore up the company in the event of the death of a key member of your leadership team.
Using a term life insurance policy in this way is called “key person insurance” and it can provide an income tax–free death benefit that makes financial assets available when they’re needed most during transitions in your firm.
Who is a key person in your business?
If you own a business, chances are you think about the company and your staff on a daily basis. Do you have an employee who would directly affect business operations if that person didn’t show up for work again?
This person might work in:
- Operations, keeping the work efficiently flowing from onboarding to satisfied customer for the entire company
- Partnerships, knowing key players in your industry and building your business partnerships
- Profitability, watching and managing the financials to ensure you stay afloat
This individual is your business’s key person. Insurance owned by the business on the owner or on another key person’s life is an important part of a business plan.
Many times this person’s deep relationships is what drives business through the door. If this person were to die unexpectedly, problems for the company may arise such as:
- Loss of skill and experience
- Disruption of revenue stream
- Loss of reputation and recruiting power
- Management and staff disruption
- Contractual benefits due to employee contracts
The costs associated with losing a key person can be tangible as well as intangible. Your organization could lose profits generated by the special talents or contacts of the key employee.
Finding a replacement to step in is usually a slow and expensive process.
Many companies have no other employees with the same knowledge, experience, judgment, or reputation as the deceased or disabled key person. Less qualified employees must fill in and their lack of experience could impact your bottom line.
Filling the position from inside means that the understudy’s duties must continue to be performed while the vacated position is being filled.
Additionally, there is a learning curve when training a new person and the company must absorb the cost of getting this person up to speed as hiring from the outside may be even more time consuming and costly.
Oftentimes an employer is contractually obligated to pay salary and/or provide benefits to the family, even if the employee cannot perform their work due to death. This situation also may cause your bottom line to take a hit.
How key person insurance works with a term life insurance policy
A key person insurance policy is a term life insurance policy that provides cash to meet outstanding obligations and maintain business continuity. These features are especially important if the key person was instrumental in securing credit or capital. Key person protection helps a business through the difficult times and reassures other valued employees, clients, vendors, and prospects that the company’s future is secure.
» Compare: Term life insurance quotes
At the death of the key person, your business (the policy beneficiary) will file a claim with the life insurance company to receive the death benefit. The life insurance carrier will pay the policy benefit income tax-free to the business.
The income tax-free death benefit can then be used to:
- Replace lost earnings
- Maintain business credit
- Provide a financial cushion
- Offset lost business value
- Recruit and hire a qualified replacement
- Make survivor income payments to the key person’s family
Key person life insurance can help businesses maintain continuity over time. Learn more in the article how to integrate life insurance into your business plan and operational budget.
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Death can occur at any time. You can’t count on cash flow to be there when needed, such as when the unexpected death of a key employee occurs. Buying key person life insurance by purchasing a term life insurance policy means you’ll have the necessary financial assets available when they’re needed. Quotacy can help you get the coverage your company needs today.
Run a term life insurance quote to see how little it would cost to ensure your business would stay afloat during difficult times. Input the data for the key person and know that your company can purchase an affordable term life insurance policy just as an individual would on our website. It takes seconds to run no cost, no obligation comparison quotes from major brands.
You won’t have to disclose your personal contact information to compare quotes from dozens of trusted life insurance companies to protect your business today.
» Calculate: Life insurance needs calculator
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About the writer
Natasha Cornelius
Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series
Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.
Can a key person life policy be added to a person’s life policy at their employer if the person is a direct family member & sharing the home mortgage & expenses?
Elaine,
Life insurance is used for many business needs, including protecting against the loss of a key employee. Whether the business is owned by an immediate family member (including a spouse) doesn’t change the value of that individual to the success of the business. Normally the insurance companies will max out the available coverage at 10 times income, although we work with a few insurance companies who will make exceptions to this rule to allow higher than 10 times income (including salary, K-1 and bonuses).
This policy is almost always owned by the business, so using an existing policy isn’t really an option. When an individual is uninsurable, there are other companies that will allow guaranteed issue as long as there are multiple other executives who need coverage as well and all will be on the group plan (this is a different type of group plan that coverage many of us receive through work).
Hi
Can I insure my defacto as we own a property together 50/50 in a trust if either of us dies our families receive thr respective half .. I would like to be able to buy his family out so to be able to continue living in our home .
He has many more assets than I and would easily be able to afford to pay out my children
Hi Beth,
It looks like you’re commenting from Australia. Quotacy is in the United States and adhere to specific federal and state regulations. Life insurance regulations may be different in your country. I advise you to reach out to a local insurance agency.
I found out a company still has a million dollar life insurance policy on me and I was fired 6 years ago – how can I report this – I am no longer a key person to this business and the business has been sold –
I am sorry to hear that there is still a life insurance policy on your life owned by a new company that you never worked for. It is surprising that they continue to pay the premiums every year. At the time the company purchased life insurance policy on you there was an insurable interest, which is a fancy way of saying that there would be a loss to the company if you died while employed there. That makes this a legitimate life insurance need.
Approximately 10 years ago some new federal laws were put in place that make companies report the life insurance policies they own on their taxes every year. So the IRS should know that they own a policy on you. There also is no requirement of the company to drop the coverage after your termination whether voluntary or involuntary. If you die while they still own a policy, then a death benefit will pay out to the new company. Since you no longer work there, the death benefit will be taxable (not income tax free as it is for your family) to the company.
Therefore, there isn’t anyone to report this to as it doesn’t sound like the company is doing anything wrong in the eyes of the law. That being said, I can’t see any reason why they would continue owning this policy, and it definitely doesn’t feel ethical. Wish I could give you a different answer to your query.
I have a couple business partners in a real estate development company. One of them happens to be a home/auto/life insurance agent. I found out he opened a $200K life insurance policy on me(not a key man policy, and not paid for or owned by our mutual business), supposedly making my wife the beneficiary, and he is paying the premiums. He did so without my knowledge and without my approval. I don’t know if he did so to reach his life policy quota or what. Can he lose his license (in OK), and/or go to jail for that?
David,
It is hard to believe that your business partner would be able to a policy on you without your consent. Mainly because there are signatures required by the insured (you) to actually receive a policy. I can’t see any way that this policy could be inforce without forging your signature. One positive on this is that your wife (supposedly) is the beneficiary. Although I would want this contract cancelled immediately.
I am unsure if you have spoken with your partner or your wife about this. Collect data! Also, you can reach out to the insurance commissioner in Oklahoma http://www.ok.gov/oid/ and share your story with them. Glen Mulready (the Oklahoma Insurance Commissioner) and his team will be able to help you get to the bottom of this unfortunate situation.