Does your business need coverage in the event of the death or disability of a key person?
Every organization has key personnel whose loss to death or disability would be significant for the firm. Large firms may have a deep enough talent base to replace key personnel but that is often not the case for smaller companies.
Key person insurance can take a few forms. The most common is a life insurance policy on key personnel that pays the company in the event of their death. The proceeds of key person policies can be used to help the firm weather the loss and recover from any drop in business that the vacuum of the departure causes. The funds may allow the remaining team to purchase the ownership interest of the surviving spouse avoiding large infusions of debt at a time when the firm may be on shaky ground. Key person life insurance is a principal component of most buy-sell agreements.
Lenders may require key person life insurance to ensure survival of the firm and to provide funds for them to be repaid. The business loan agreements often define the loss of an executive or key member of management as an event of default. The bank wants to put on the brakes and understand whether the firm can survive and whether the bank wants to continue as the firm’s lender.
Key person life insurance is not tax deductible in the US. But neither are the proceeds of a life insurance policy taxable upon receipt.
In addition to key person life insurance, you should consider key person long term disability coverage. If an executive become incapacitated; the firm would suffer a comparable loss and the family of the executive may expect to have their ownership to be bought out by the remaining owners.
Policies of this sort are priced in the same way life insurance and LTD are priced where the beneficiary is the family. Ratings take into account the health and life style of the insured which argues for obtaining the policies early in the career of a rising star. A heart attack might result in the loss of an executive, but it may be impractical for the firm to obtain life insurance coverage on the executive.
If your business doesn’t have this type of coverage or it hasn’t been reviewed lately, it is time to contact your agent.