Key Person (Key Man) is a life insurance policy purchased with the intention of compensating the business for the loss of services of an important (key) person due death.
Often the key person is a "rainmaker" that is responsible for a significant portion of the business revenue. In some situations the loss of the key person can create a financial strain on the business, even to the point of forcing the business to close or sell at a loss.
In a key person life insurance plan, the key person is the insured; the business is the owner, premium payer and beneficiary.
Key person premiums are not tax deductible to the business. The policy proceeds are not taxable.
One example of key person life insurance would be to guarantee a quick and easy sale of the business upon the owner's death.
For example If the owner has a wife and children that are not active in the business and would have no idea how to run it, they would probably sell it in a distressed manner if the owner died unexpectedly.
If he has a key manager that would be the likely person to sell it to they can purchase a life insurance policy on the owner's life with the key man as the policy owner. The business can bonus the money to pay the premium to the key man. An attorney will write up a buy-sell agreement and the if the owner dies, his manager has the money and an agreed on price to buy the business from the widow. This makes the transition much easier for the widow PLUS has the benefit of keeping your key employee from straying off and being attracted to greener pastures.
When there are multiple business owners, they each need a life policy on each other plus a legal agreement so they can buy out the spouse's interests if one of them dies. They don't want a business partner just because she/he happened to be married to their former business partner.
In most business scenarios there are rainmakers, those who generate revenue and admin operators, those who run the day to day internal process of a business. Business owners want to protect these key employees with life insurance and (disability for that matter.) In the death of such a key employee, the business would be paid the proceeds of the policy to continue functioning.
Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
Most businesses have key employees who are impact players in the company. The company depends on their performance and they're vital to the future of the business. Placing key person life insurance on them can protect the business from the death of a key employee and provide cash to recruit and train a new employee.
Usually, the way Key Person Life Insurance works is that the employer or business takes out a life insurance policy on an important employee in the company, one that is vital to the success of the business and would need to be carefully replaced if he or she died. The employer or business pays the premium and and is the beneficiary. If death of the key employee occurs, the business has money to protect them from loss of production and solicit and train a new employee to replace the key person.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
This appears to be a simple question; however, publicly traded corporations have found that by purchasing key person policies on senior executives they can provide lavish payouts when that executive leaves the firm. The idea is simple; the corporation has an insurable interest in the life of the executive. There are costs of securing a replacement and it the loss of a key employee can affect the company’s ability to borrow money. All these factors and many others make these senior executives very valuable. The corporation can insure them to make up the financial impact that their unexpected death would make. By using cash value life insurance they can also accumulate a large amount of cash which will ease the transition when the executive leaves.
.JPG){kind=avatar}
Often the key person is a "rainmaker" that is responsible for a significant portion of the business revenue. In some situations the loss of the key person can create a financial strain on the business, even to the point of forcing the business to close or sell at a loss.
In a key person life insurance plan, the key person is the insured; the business is the owner, premium payer and beneficiary.
Key person premiums are not tax deductible to the business. The policy proceeds are not taxable.
For example If the owner has a wife and children that are not active in the business and would have no idea how to run it, they would probably sell it in a distressed manner if the owner died unexpectedly.
If he has a key manager that would be the likely person to sell it to they can purchase a life insurance policy on the owner's life with the key man as the policy owner. The business can bonus the money to pay the premium to the key man. An attorney will write up a buy-sell agreement and the if the owner dies, his manager has the money and an agreed on price to buy the business from the widow. This makes the transition much easier for the widow PLUS has the benefit of keeping your key employee from straying off and being attracted to greener pastures.
When there are multiple business owners, they each need a life policy on each other plus a legal agreement so they can buy out the spouse's interests if one of them dies. They don't want a business partner just because she/he happened to be married to their former business partner.