Businesses
The employer identifies a key employee whose death would result in financial loss to the business. The business gives notice that it intends to insure the employee’s life and obtains the employee’s written consent.
The employer applies for, owns and is the beneficiary of insurance on the key employee’s life. The premiums are not deductible by the employer.
When the employee dies, the business receives the proceeds to compensate for the economic loss suffered as a result of the key person’s death.
As a business owner, your most valuable asset in your company is, and always will be, your best people. Key employee life insurance is needed because, at any given moment, a business can suffer from a key employee’s death in a number of specific ways. One is the loss of the person’s management skill and experience, especially in a business with little management depth. This is a true custom-tailored plan that helps businesses accomplish long-term goals, multitask dollars, and protect assets while building lasting wealth.
Key person life insurance reimburses a business for economic loss when an employee who is critical to the success of the business dies. Key employee life insurance is not a specific type of policy, but a way to use life insurance to off-set a significant business risk. A key employee may or may not be an owner; however, key employees are generally highly paid and responsible for management decisions, and exert a significant impact on sales and enjoy a special rapport with customers and creditors.
If a business suffers from a key employee’s death, the business notifies the employee that it intends to purchase a specified amount of life insurance on the employee’s life and obtains the employee’s written consent. The business applies for and is the owner and beneficiary of a policy on the key employee’s life.
HOW DOES IT WORK?
The business notifies the employee that it will purchase a specified amount of life insurance on the employee’s life, and the key person consents in writing. The business applies for and is the owner and beneficiary of the life insurance policy. If the insured employee dies, the business receives the policy proceeds. Premiums are not deductible, and death proceeds are usually not subject to federal income tax. Because the business holds all incidents of ownership in the policy, the death proceeds are not included in the insured employee’s estate for federal estate tax purposes unless the employee is a sole or controlling shareholder. In this situation, a corporation’s incidents of ownership are attributed to the shareholder-employee.
WHAT ARE THE BENEFITS?
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.