You know that your employees help make your business a successful, thriving enterprise. In fact, you can identify some employees as “key” to that ongoing success. They possess unique skills, expertise, decision-making power and vision. Their unplanned absence can disrupt company earnings, productivity and morale. Key person insurance helps to manage this risk.
What is a Key Person Life Insurance Policy?
A key person life insurance policy protects against losses as a result of the death of a key person at your business. The policy’s death benefit provides capital to help the company absorb the absence of the key person. Unlike other sources of capital – such as a sinking fund, a loan, or company earnings – life insurance provides liquidity precisely when the need arises: upon the death of a key person. Further, disability riders are available that can waive premium payments in the event of the insured’s total inability to work due to disability.
How Does It Work?
After working with underwriting to determine an appropriate policy amount, the business pays the life insurance policy premiums and is typically the owner and beneficiary of the policy. As owner of the policy, the business may access cash values, via loans, during the executive’s lifetime. When the key person dies, life insurance proceeds are paid to the business and can be used to offset losses.
Alternatively, upon the key person’s retirement, the company may decide to sell or bonus the policy to the insured, surrender the policy or simply keep it in force.
Benefits and Additional Considerations
The Benefits
When permanent life insurance is used, the business (as owner of the policy) has access to cash values during the life of the insured.
Accumulated earnings tax will not accrue if life insurance is purchased to reasonably compensate the business for a loss.
The business can receive an income-tax free death benefit upon death of the key person, thereby providing liquidity precisely when the need arises.
Optional disability riders are available that waive premiums in the event of the insured’s total disability.
Business Exchange Rider may be used to substitute a new insured upon the key person’s retirement (subject to insurability).
Additional Considerations
The employee should be a key person in the business. This includes directors, executives, or employees with unique skills and talents.
To help ensure that death benefits are received income-tax free, the business must obtain notice and consent from the insured employee, prior to issuance of the policy.
The company should adopt a board resolution authorizing the policy and documenting the need for key person protection.
Cosmo Insurance Agency is an independent insurance agency serving surrounding communities in New Jersey. Cosmo keeps its promise to assure an efficient and creative approach to the services we offer. Each of our clients experience a personalized and long-term relationship with us. Our New Jersey based team of health brokers guides our clients in helping them choose the most cost-effective options. By incorporating the latest in technology-based tools and laws on healthcare, employee benefits, life insurance and finance, we keep our clients up-to-date with the plans that encompass all of their needs, whether it is individual or group insurance.
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