Key Man Life Insurance Options

Written on February 6, 2017 by Bill

All companies have key employees but few of them have key man life insurance. Key man or key person life insurance is an insurance policy that protects a business from the premature death of an essential employee. The death or disability of one of these key employees could result in the failure of the company or at the very least, financial hardship.

Key man life insurance is an integral part of life insurance for small business owners. Any business that depends on an employee or several employees for the success of their business should understand their key man life insurance options.

How Does Key Man Life Insurance Work?

The way key man insurance works is the company takes out a life insurance policy on the key employee. The company decides the value or coverage amount that would be needed to replace that employee should the employee die. The value could be could be calculated in several ways. It could be calculated by multiples of the individual’s salary, contribution to the company’s profits or what it might cost to replace the employee such as, training, hiring and selection.

Free life insurance quotesThe insurance company will require information about the nature of the business, when the company was started, it’s net worth and if the key person being insured is the owner. If the key person is an employee, they will require the role and job description of the employee.

Applying for Key Person Insurance

Usually an underwriter will accept applications for coverage amounts between 5 and 10 times annual earnings. Bonuses can be included also which could increase the amount of coverage needed. If the key employee has an ownership interest in the company, a percentage of company’s net income can be added to the coverage amount. In most cases, the employee must submit to an insurance medical exam. A fully underwritten key person life insurance policy will also require, health history records from physicians, financial and motor vehicle background checks.

Please note: If the employee does not want to submit to an insurance exam, a no exam life insurance policy could be another option. You can learn more by reading this article.

The insurance company will want to know how the amount of coverage being applied for was determined. The underwriter will also want an overview of the employee’s specialized skills.
The insurance company will also require a “Employer Owned Life Insurance Acknowledgement and Consent” form which can be supplied by the insurer. The document needs to be signed by the employee before policy approval.

Who Owns The Policy?

The company will be the owner, the payer and the beneficiary of the policy. The employee is only the insured. If the key person were to die unexpectedly, the company would have funds to continue business until a suitable replacement is found and trained. Money could be used for hiring and training. Pay debts to creditors or investors. The life insurance proceeds help the company avoid bankruptcy or loss of business for the short-term.

Are The Premiums Tax Deductible?

Key man life insurance premiums are not tax deductible. Internal Revenue Code 264 states: No deduction shall be allowed for premiums on any life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy or contract.

Are Proceeds from Key Man Life Insurance Taxable?

In most cases, yes. The proceeds to the business from the key person life insurance are considered income to the business unless: A notice of consent requirements between the employee and employer are met before the contract is issued. In addition, IRS form 8925 must be included with the employer’s annual income tax return. Please consult your tax advisor for more detailed information.

What Type of Key Man Life Insurance Policy Should You Choose?

There is no right or wrong type of policy to choose. Deciding on the right type of coverage depends on the goals of the company and key employee. For some companies, term life is the right choice if the insurance needs are short term. For long term needs, Permanent insurance could be more appropriate.

Term Life Insurance:

Term life is the most affordable option for many small businesses. Term policies come in various lengths or terms: 10,15,20, 25 and even 30 years. The cost or premium and the amount of coverage are fixed (level) for the duration of the policy.

However, once the term is over, the policy ends. Obtaining a new policy could mean having the employee go through the underwriting process again. Sometimes, because of previous health issues, the employee might not qualify for a new policy or must pay higher premiums.

No Exam Life Insurance

Another viable option for key person life insurance is a no medical exam policy. These polices are growing in popularity and there are many options. This type of policy is appropriate for an employee who does not want to take an exam. There is still an application and most companies require background medical history but it is easier than a fully underwritten policy.

A no exam policy is a viable alternative but is generally more expensive than a fully underwritten policy. There several insurance companies that we represent that will offer up to $500,000 without a medical exam. Call us at 914-633-1717 for a free quote.

Permanent Life Insurance:

There are 2 types of Permanent life insurance: Whole and Universal Life:

Whole life insurance builds cash value and is long term coverage. As long as premiums are paid, the policy will stay in force for the lifetime of the insured. A major benefit of cash value life insurance for a business is an option to access the cash value as a tax-free policy loan.
Cash value gives a business liquidity if funds are needed in a hurry. It can also give your key employee an incentive to stay with your company until his or her policy has been fully vested.

Universal Life Insurance:

Universal life is part of the permanent insurance family and works very similar to whole life insurance. The major difference is that universal life premiums are generally lower. The policies offer flexible premiums and the emphasis is more on insurance protection than the buildup of cash value.  Additional universal life policy options are: Guaranteed Universal Life, Indexed Universal Life and Variable Universal Life.

Explore Your Key Man Life Insurance Options – Let’s Get Started!

Our company specializes in finding the best life insurance policies at the lowest possible prices. We do not favor one life insurance company over another. We work with over 30 of the best life insurance companies to provide you with unbiased advice. For a free life insurance consultation and for free quotes from dozens of top rated life insurance companies, please call us today or enter your information into our free quote engine.

About Behr Insurance
About Behr Insurance

Bill Behr has been helping people make smart decisions regarding life insurance planning for more than 20 years. While most insurance advisors attempt to be everything to everyone, Bill focuses on the life insurance needs of families and business owners. Contact me directly at: 914-633-1717 to learn how you can save money.

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