Key employee life insurance can protect your business. I believe in it, I specialize in it, and I have it in place at my company.
If one of my key employees dies, it would have a huge impact on my business. A keyman insurance policy allows a business to withstand the blow.
A key person could be anyone directly associated with the business whose loss could put financial strain on the enterprise. It might be a director, a partner, a key sales person, a key project manager or someone with specific skills or knowledge.
Ownership options for keyman insurance policies
Keyman life insurance policies can be owned in a number of ways, depending on the needs of the business.
It’s common for a business to own the policy with claim proceeds being paid directly to the business.
See also: Why business owners need life insurance.
There’s no legislative or insurable requirement for a policy to be owned by a specific party or entity. There may be circumstances — such as for taxation or policy continuation purposes — where policies may be owned and paid for by the insured person directly, or owned by another individual.
7 advantages of keyman insurance
Keyman insurance offers several advantages to companies. Here are seven of them:
- If a keyman dies, the company is paid money to cope with the loss. The proceeds will allow the company to function normally, while it looks for a replacement.
- Any U.S. business buying keyman insurance for its employee can claim a deduction for the premium paid for the policy as a business expense. (Check on this with your CPA/tax attorney.)
- The policy can be used as either an extra super annuation benefit (that is, a retirement benefit) or an ex-gratia payment (paid without legal obligation) to the key employee during the service period. If the company receives the proceeds on maturity, they may be taxable. (With recent changes in rules, only Term Plan is available under keyman insurance. So there will not be any maturity benefit.)
- The policy can be given as a boost in compensation and can save on income tax for executives who earn high salaries.
- It helps the business in its tax planning.
- Company directors can safeguard their immediate family from the effects of the death of the keyman employee, which ultimately could impact the industry along with various business cycles.
- The policies improve retention of key employees.
And a disadvantage
The amount on claim or maturity under a keyman insurance policy is not exempt of the Income Tax Act, if the company is paying the premiums — unless the policy is assigned to the key person who pays the premium himself.
If the policy is surrendered, then the amount endorsed is taxable in the hands of the keyman as profit in lieu of salary.
Bottom line: On balance, if you have a business and rely on a key employee, it’s smart to consider this type of policy.
Vicki Gunvalson is owner of Coto Insurance & Financial Services in Orange County, and star of Bravo’s “The Real Housewives of Orange County.”