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.
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.
GROUP LIFE INSURANCE, GROUP DISABILITY INSURANCE
Providing your employees with affordable financial protection is paramount to making your team feel appreciated and cared for. Many plans allow your team to be covered via very simplified underwriting, or even guaranteed-issue. Coverage can also be portable and convertible! Looking for a review of your current plan? Or perhaps a more strategic option? Get in touch for a complimentary plan review.
BUY-SELL AGREEMENT LIFE INSURANCE
A buy-sell agreement, also known as a buyout agreement, is a contract funded by a life insurance policy that can help minimize damage resulting from the sudden departure, disability, or death of a business owner or partner. While a key man policy addresses day-to-day operations of a business, buy-sell agreements address ownership in the event that one of multiple owners passes away. A buy-sell agreement is one of the most under-utilized (yet highly critical) planning elements for businesses with multiple owners.
This contract is among business owners which, upon the death of one of the owners, requires the remaining owners or the company itself to purchase the deceased’s interest in the company according to the agreed upon terms of the contract. In addition, the deceased’s heirs are required to comply by selling their inherited interest at the previously agreed upon price.
Without a buy-sell insurance plan, the death or disability of an owner or partner can trigger a domino effect that can cripple a company.
COLLATERAL ASSIGNMENT OF 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.
