Keyman Insurance

Key employee life insurance helps reimburse a business for economic loss that occurs when a key employee dies. The insurance covers the life of an employee who is critical to the success and profitability of the business. Key employee life insurance is not a specific type of policy, but is a way to use life insurance to offset a business risk. A Fortune Management representative will discuss this in greater detail and uncover affordable solutions to this liability.

A key employee can be anyone who: 

• Is responsible for management decisions
• Is highly paid
• Has a significant impact on sales
• Has a special rapport with customers and creditors

Businesses can suffer from a key employee’s death in four ways:

• Loss of management skill and experience
• Disruption in sales or production
• Credit difficulties such as inability to make payments or creditor reluctance to extend credit
• Increased expenses associated with hiring and training a replacement
• The business applies for and is the beneficiary of a policy on the key employee’s life

The amount of insurance can be based on:

The contribution to earnings method: The business estimates the employee’s annual contribution to corporate earnings that the business stands to lose by reason of his or her death. This contribution is multiplied by the number of years the employee would have worked, and this earnings stream is discounted to present value. 

The cost to replace experience method: Reduce the amount of the key person’s compensation by the salary that would be required to pay someone else to perform routine duties. The difference is then multiplied by the number of years required to bring a replacement to the key employee’s level of experience.

Premiums are not tax-deductible since the business is the beneficiary of the policy. Proceeds are typically exempt from federal income tax, but if paid in installments, the interest portion of each installment is taxable. If the business is a C corporation, proceeds it receives as the beneficiary could be subject to the corporate alternative minimum tax.

Properly structured, the insurance has no tax impact on the employee unless the employee is also one of the business owners. In this case, the value of the deceased owner’s business interest in his or her estate may be increased when the business receives the proceeds. If the insured does not die while employed, the cash and loan values are available to the business to use for other purposes. The policy can be used as leverage with creditors to demonstrate financial stability, or as collateral for a loan.

For key employees who are owners, the policy could help fund a buy-out of the deceased person’s business interest. If the policy is not needed to protect the business, it can be earmarked to provide deferred compensation funds or retirement income for the key employee.

For information contact us.