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Key Person Life Insurance Guide

As a business owner, one of your main priorities is ensuring the continued success of your company. But what would happen if one of your key employees unexpectedly passed away or left? If your company relies on the contributions of one or more specific individuals, key-person life insurance can be an important tool for mitigating the financial risks associated with their death or disability. This type of insurance protects your company by providing financial compensation that can be used to cover expenses such as the recruiting and training of a replacement, lost business during the transition, or funding a buy-sell agreement, if necessary. In the event of a key person’s departure, key-person life insurance can provide your company with much-needed cash flow to keep operations running smoothly, offering much-needed financial stability during a time of upheaval. By understanding the key features of key-person life insurance and how it works, you can help ensure that your company is prepared for the unexpected.

What is Key-person Life Insurance?

If your business relies on one or a few major employees, you probably have a plan in place for their retirement or a planned separation. This individual may be one with experience and skills that are not easily replaced, such as a vital employee, partner, or majority stockholder. If they suddenly leave the company for any reason, then life insurance for a key employee may cover costs associated with your organization’s unexpected changes.

In order to determine who needs key-man life insurance, it’s crucial to first understand the ins and outs and how it works.

  • The company owner or employer is the purchaser of the key-person life insurance policy, owns the coverage, and is the beneficiary.
  • If the key person remains with the company, the transfer of key man life insurance to employee as a retirement benefit can be arranged (if this is written into the insurance plan as an option).
  • The key-person life insurance cost (premium) will depend on the individual’s health history, physical condition, and age, as well as the amount of coverage provided. Cash value of key person life insurance relies on the same factors.
  • IRS guidelines may allow for tax-free funding from the policy to be used for finding and training a replacement and other associated costs.
  • The policy may cover the buyout of the person’s shares or interest in the business.

Why Get Life Insurance for Key Employees?

affordable key person life insurance

In the event of a sudden loss of an employee or partner that is vital to your company’s success, key-person insurance coverage can protect your risks along with numerous advantages. First, key-person life insurance taxation on benefit payout may be tax-free. You’ll also be providing confidence in your organization’s continued success for your lenders, customers, stockholders, employees, and so on. These insurance policies are easy to obtain and only require an annual report for the IRS. In the event of a key employee death or disability, using policy benefits is flexible and simple.

What to Know About Key-person Life Insurance

When your organization is considering purchasing key-person life insurance, it’s important to determine if this coverage is necessary in the first place. If you have vital employees without whom your organization’s operations would struggle or cease, this insurance is a good idea. Once you’ve determined that you do need a key-person policy, estimate the overall value of this individual. What revenue or contracts would be lost without their presence? What associated costs would come with replacing this person and training a new recruit? How much might your business lose in the transition? How much coverage will you need to buy out their shares or interest in the company? Ultimately, you may want to discuss these important considerations with a professional. The Nowell Agency has decades of experience with key-person life insurance coverage and we have a wide range of available policies or we can customize a solution for your specific needs. Most importantly, we understand how to protect your key assets to keep your company running smoothly and successfully. Contact us today or click for a free key-person life insurance quote!

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