Key Person Insurance

Posted on: December 1st, 2011 by Peter Choma

Key person insurance helps protect the company in the event of a death of a key stakeholder.

As a business owner, you may depend on a number of key people for the successful function of your business. Many businesses have been built around the strengths and skills of a few individuals whose knowledge, or experience makes them a valuable asset to the business.

Key person insurance can help protect the value of your company and help keep the company running in the event of a death of a key stakeholder in the company. Replacing the knowledge of a vital employee can take time and money and can jeopardize the continuation of the business.

A key person life insurance policy can offer the following benefits:

  • Help heirs of the estate to meet tax obligations without effecting the operation of the business.
  • It insures creditors do not call loans and customers will have knowledge that the business will operate as usual.
  • Helps reduce the financial impact of the death of a key person by covering the expense of finding and training a 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.

Example: John is the owner of a Stereo shop that employs 5 full-time employees. John relies heavily on Margaret, his store manager, who looks after the day-to-day operations of the business while he is looking for new products to sell in the store. Margaret dies suddenly by a tragic accident. This would have an impact on the company and cause a huge financial blow.

The “key person” life insurance policy that John purchased on Margaret’s life provides the company with a tax free lump-sum payment, enabling John to overcome what might have been a deadly blow to his business. The insurance provides immediate cash to cope with reduced profitability, resulting from the death of his manager.