How Does Key Person Life Insurance Work?
Here’s a general guide detailing how key person life insurance can protect businesses:
- The employer purchases life insurance on the key individual(s).
- The employer is the beneficiary of the life insurance policy, and applies for and owns the policy. If the key employee dies prematurely, the policy pays out to the employer.
- Tax-free dollars from the policy can be put towards finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.
- The policy can be transferred to a departing key employee as a retirement benefit, or to a different key individual upon the retirement of the original key employee.
- The policy can be used to buy out the key employee’s shares or interest in the company.
- Premiums are based on several factors, including the key employee’s age, physical condition and health history. The amount of coverage also affects the premium.
Key person life insurance has a number of advantages:
- It can be easily implemented and does not require Internal Revenue Service (IRS) approval. A policy only requires an annual report to the IRS.
- Life insurance benefits are paid to the company tax-free.
- Customers, creditors, lenders and stockholders have the assurance that the business has a continuation plan and coverage in place.
- There is flexibility in how the funds can be used.
- Leverity Insurance Group, Inc. understands that your key assets need protection and we are here to help. Please contact us today to learn more about our key person life insurance solutions.