Key person life insurance serves a number of uses benefiting a business, both during the key employee’s life and after the employee’s death. Death proceeds are generally exempt from federal income tax when the notice and consent requirements have been met. If the insured employee doesn’t die while employed, the policy’s cash value is available to the business.
Key person life insurance demonstrates financial stability to creditors. If the key employee is an owner of the business, the policy can help fund a buy-out of a business interest when death occurs. If the employee lives, the policy’s cash value can be used to provide employee compensation.
BUY-SELL AGREEMENT LIFE INSURANCE
This is a conditional assignment appointing a lender as the primary beneficiary of a death benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the life insurance policy and recover what is owed.
Businesses readily accept life insurance as collateral due to the guarantee of funds if the borrower dies or defaults. In the event of the borrower’s death before the loan’s repayment, the lender receives the amount owed through the death benefit, and the remaining balance is then directed to other listed beneficiaries.