By Michael Horbal – updated on – 09/21/2022
Key-person life insurance protects your business from financial hardship in the event of a key employee’s death.
The death benefit proceeds give you time to react and plan for a replacement.
Everything needed is here, including consumer guides from a top life insurer.
At RiskQuoter, we’ve been helping business owners since 1998 to get the coverage they need at the best life insurance rates available.
What is key person life insurance?
Key-person life insurance is bought by a business to protect it financially from losing an executive, partner, owner, or employee whose death would negatively impact the business.
Having coverage gives you time to react to the untimely death by providing you with cash flow as you go through the mourning process and search for a new employee.
We found this Prudential consumer guide on this topic very helpful.
When should a business buy key person life insurance?
The top 5 reasons for buying key person life insurance are when that key person:
- Has unique talents that are difficult to replace.
- Brings in a large portion of your sales.
- Is the owner of a business you are buying.
- Owns the business and the SBA bank requires it for collateral purposes.
- Are an executive, and the business is bringing in investors.
Once you have identified your key people, it’s crucial to determine the financial impact their death would have on the business. The business is the owner and beneficiary of any policy.
And when you need life insurance quickly, we have companies that offer $500k life insurance – no medical exam needed!
Companies review your medical records using Human API and check your file with the MIB.
Skipping the paramed exam requirement may save you weeks of underwriting time.
If you’ve never applied for life insurance, check out our guide – Life Insurance for Dummies. This is our life insurance 101 article and tells you everything.
Is key person life insurance tax deductible?
Here’s our disclaimer – We do not provide tax, accounting, or legal advice. You need to consult your professionals for advice on taxes, accounting, and/or legal advice.
Generally speaking:
- Key person life insurance premiums are not tax deductible
- Premiums are not taxable income to the employee
- Death benefit proceeds are exempt from income taxation
Now would be a good time for you to reread our disclaimer. Here’s why.
Some pitfalls and situations could subject life insurance proceeds to taxation.
Make sure you check taxation issues with your CPA before buying life insurance.
Employer-owned life insurance is subject to taxation unless it meets specific notice and consent requirements before the policy is issued and if certain exceptions apply.
The Pension Protection Act of 2006 is worth reading as it contains related information.
Here’s another excellent Prudential guide for employer-owned life insurance.
If you haven’t read our disclaimer (it’s highlighted above)
The Internal Revenue Code spells out the details as to when death benefits may/or may not be taxable.
Remember, your tax, accounting, and legal advisors are the people to ask about key person life insurance taxation.
Types of key person life insurance policies
Types of key-person life insurance policies include:
- Term life insurance
- Universal life insurance
- Index Universal life insurance
- Return of Premium (ROP)
- Whole life insurance
For most businesses, the type of life insurance most often used is a term life insurance policy, which provides the death benefit needed at the lowest price.
You can get term lengths as short as one year or as long as 40 years.
Get a term policy with an excellent life insurance conversion privilege, as you may be able to sell the policy later via a life settlement.
If you are in the marijuana industry and need key person coverage, we now have a marijuana-friendly life insurance company available.
Make sure you consider available riders such as accelerated benefits, accidental death, long-term care, and waiver of premium that may be helpful.
Final Words
Your business should consider key person life insurance if the death of those key people would financially impact your business.
Get a quote today, and we’ll contact you to go over the details and ensure that you have the right policies to protect your business.
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