Key Person Insurance
As a business owner, you may rely on a number of key people for the successful operation of your company. Many businesses have been built around the strengths and skills of a few individuals whose capital, energy, knowledge, or experience makes them a valuable asset to the organization.
Key person insurance can help preserve the value of your business and its continuation in the event of the death of a key stakeholder in the company. Replacing the expertise and knowledge of an essential individual can take time and money and can jeopardize the continuity of the business. A key person life insurance policy offers the following benefits:
- Help heirs meet estate tax obligations without compromising or dissolving a family business
- Keep the business running and assure creditors and customers that the company will operate as usual
- Reduce the financial impact of the untimely death of a key individual by covering the expense of finding and training a suitable replacement
How Key Person Insurance works
The employer would be the owner and beneficiary of the policy. The key employee would be the life insured, but would receive no benefit from the existence of the policy. Under the “Income Tax Act” no deduction can be claimed by the employer for premiums paid under a key person policy. However, any death benefit proceeds would be received tax free by the employer and would provide the liquidity needed to hire and train new skilled individuals and provide cash flow through a period of sales decline.
Example: George Smith is the owner of a growing software company that employs 20 full-time workers. He relies heavily on Frank, his manager, to look after the day-to-day operations of the business while he is out dealing with clients and looking for new business. Frank dies suddenly of a massive heart attack. Obviously this has an emotional impact on the company but it also has a financial impact.
The “key person” life insurance policy that George has purchased on Frank’s life provides the company with a tax free lump-sum payment, enabling him to overcome what might have been a deadly blow to his business. The insurance provides immediate cash to cope with reduced profitability, resulting from his manager’s absence. There will also be funds available to pay an employment agency to find a replacement and reassure creditors that company is on solid footing.
Similar type programs can be set up to protect against a critical illness or the disability of a key employee.
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