Key man life insurance helps to protect a business’ most important asset: human capital. A business purchases this specific policy to insure the life of a company employee. Specifically, the insurance is designed to insulate the company from the losses of an employee that contributes significantly to the business. Common employees whom the company would insure include executives, top salespeople, employees with a unique knowledge base or skill set or anyone whose death would reduce the company’s value.
How does key man insurance differ from other life insurance?
Unlike other life insurance policies, key man insurance provides for the business to act as both owner and beneficiary on the policy. While the business must obtain the employee’s consent, the policy provides the insured with no rights. Term policies suit key man insurance primarily because they do not accumulate a cash value.
Factors that influence cost include the benefit amount, the health of the employee, and type of policy. A business may purchase permanent life insurance if seeking to attract prospective employees can transfer the policy to the insured and incorporate it into the compensation structure as a retirement incentive or for levels of performance. In businesses such as a sole proprietorship, an individual life insurance policy would have more practical value.
Tax considerations
Lenders often require key man insurance to obtain a loan or an investment, especially since small businesses rely on a few skilled employees. Tax implications also arise with key man insurance. Premiums on a key man life insurance policy are not tax-deductible. Any transfer that makes the insured a beneficiary, i.e. have ownership in the policy, may require the beneficiary to pay taxes.
An employee’s worth often has an unquantifiable value. Businesses that retain employees with a brand or skills may find key man insurance a worthwhile purpose. An attorney with experience in business law and contract disputes can help you understand your options.
