Agile Insurance Strategies

Insurance Risk Management‚Äč

Key Employee Life Insurance

Key Employee Life Insurance Importance 

The success of a closely held business often depends on the personal services of a key employee.  The loss of a key employee's services due to death or disability will probably result in a loss of income at least temporarily, to the closely held business.  Term insurance can be purchased if the primary concern is the key employee's dollar value to the business.  In addition, the business could incur increased expenses if a replacement employee has to be recruited at a higher salary and requires extensive training.

Key employee life insurance, however, is usually coupled with some other purpose, such as providing a retirement benefit for the key employee.  Permanent life insurance is typically purchased to meet this objective.  The business receives the life insurance death benefit as compensation for the income loss and/or increase in expenses resulting from the key employee's death.  If the insured survives to retirement, the corporation can use the cash surrender value to fund a retirement benefit.

Who Is a Key Employee?

A key employee is someone whose knowledge and skills contribute significantly to your business income.  Potential replacements may possess this same skill, but replacement employees might have to be recruited at higher salary levels.  Or, perhaps, the employee has a significant customer or client base and is responsible for attracting significant amounts of business.  As another example, the employee might be a source of capital if his or her loss would damage the closely held business's credit rating.

Policy Owner and Beneficiary 

The business should be the owner and beneficiary of a key employee's life insurance.  The premiums for key employee life insurance are nondeductible, and death benefits are not taxable.  However, as owner of a Key Person Life insurance policy you should consult with your own tax accountant.