Every business owner, every contractor, every sole proprietor, has a “Joe” – that one employee who is an integral part of the business. It could be a key salesman, a key foreman, a key scheduler, or a key office employee. Whoever it is, that individual has special talents, skills, or experience that makes him or her a critical contributor to the long term success of your company. If that key individual should die unexpectedly, your business would be at risk. You could lose certain clients, projects in process might go unfinished, and pending sales might be lost. The death of a key employee could even end up leading to your company’s demise.
It doesn’t have to be that way, though. A key man life insurance policy can protect your business from the hazard of losing one of those valuable employees who contribute to your firm’s success. It can provide the financial means to stabilize your company and help it survive during the adjustment period after the loss of a key employee.
With key man life insurance, the business buys a life insurance policy on the life of the key employee in an amount necessary to adequately replace that individual in the event of death. The amount is generally based on a multiple of the employee’s salary or on an estimate of his or her contribution to the company’s bottom line. The business will own the policy, pay the premiums, and be the beneficiary in the event the key employee dies. The premium payments are not tax deductible, but the death benefit received is income tax-free. That money can be used for any purpose the business chooses, including covering expenses associated with finding capable replacements or covering short term revenue deficits.
Key man life insurance can be either term insurance or permanent insurance. Term, of course, has a lower initial cost, but the premiums will increase over time. Generally, there is no return payment unless the insured individual dies. Permanent insurance, on the other hand, has a higher initial cost, but builds cash equity that can be used by the business for expansion or can serve as a possible future retirement benefit for the key employee, if you choose. Over time, the net premium outlay for permanent insurance may be less than that of term insurance. Talk with your Pekin Insurance agent to determine which would be the best option for you.
Key man life insurance will provide you (and your bankers or shareholders) peace of mind through the knowledge that your business can continue operations without major disruption if a key employee dies unexpectedly. If your business would be dramatically impacted by the loss of one or more of your top people, you should purchase key man life insurance policies to protect your company.
Gary Tiffany, MSFS, CLU, ChFC, LUTCF
Advanced Sales Representative