Industry Experience

Key Person Executive Life Insurance

Multipurpose key person insurance protects a business from the financial losses that can occur when a key employee dies. Such a key employee could be the owner of the business, or a nonowner employee whose very specialized abilities are critical to the operation of the business and difficult or costly to replace. Adequate amounts of key person insurance are essential in any risk management program. Since the existence of business debt “signals a need for insurance,” key person insurance can function as a form of commercial loan protection, as well as provide needed funds when a business is to be continued, sold, or liquidated.

DURING LIFETIME. This protection is provided by having the business obtain insurance on the life of the key employee. As both owner and beneficiary of the contract, the business pays the premiums directly to the insurance company. The contract’s cash values are carried as a business asset, and are available as collateral for securing commercial loans, or for direct borrowing from the insurance company at generally favorable interest rates.

Many guidelines are used in estimating the dollar value of a particular key employee. However, the value can be most easily estimated by using a factor of three to ten times the employee’s salary. Other guidelines that have been employed involve either a determination of the employee’s replacement cost, or an estimation of lost profits or credit.

UPON DEATH of the key employee the insurance company pays the death benefit directly to the business. The funds are treated as an addition to surplus and are received free of any direct income taxes.

The proceeds can then be used for various purposes. Should it be determined that the business will be continued, these can be used to obtain a qualified replacement, replace lost profits, protect its credit position, provide a financial cushion, fund a partial stock redemption or make survivor income payments. If the business is to be sold, then there is money available to fund a full stock redemption. In case of liquidation, the cash will benefit the surviving family by offsetting lost business value.

Key Person Insurance