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Key Person Life Insurance Protection
Often the operations of a business will depend on one key employee or small group of employees showing up each day for work. These people are typically highly trained experts in their industry, or they will have complex jobs that are hard to do. Either way, they are critical to the company’s operational success. To protect a business against the untimely death of that person, owners will often purchase a special kind of insurance called Key Person Life Insurance.
Does Your Company Need Key Person Life Insurance Protection?
Here are some questions to ask should your key employees suddenly be unable to do their job:
– Would your business cease to operate?
– How would your operations change drastically?
– Is there another to take that person’s place?
– How much would it cost to hire another to fill the void?
If any of these questions raises a red flag, you may want to consider buying some life insurance on that key employee*. This policy may provide the funds needed to help run a company until a replacement is found or another solution determined.
As the policy owner and beneficiary, the business would pay the premiums. The best policy could be relatively inexpensive term life insurance. If the key person dies, the company receives the death benefits and decides on a future course of action.
Using Life Insurance as Part of a Buy/Sell Agreement
Buy/Sell Agreements control what happens to an ownership interest in the event of the death or disability of one of the primary owners of the business. Paperwork is structured so that the business or remaining owners buy back the company interest upon the death of an owner. Many companies use life insurance as a means to fund these types of agreements.
Buy/Sell Agreements will include some valuation guidelines for the business.For instance, if the business is valued at $3 million and one owner has a one-third stake in the company, the business may buy a $1 million term life policy. The proceeds could be used to purchase the deceased owner’s shares on their passing.
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*NOTE:Special tax rules apply to corporate ownership of life insurance policies. If you are considering this type of arrangement, consult with a qualified Insurance Agent, attorney and tax advisor before making any changes to your business insurance policies.