Key Person Insurance

As a business owner, you may rely on a number of key people for the successful operation of your company. Many businesses have been built around the strengths and skills of a few individuals whose capital, energy, knowledge, or experience makes them a valuable asset to the organization.

Key person insurance can help preserve the value of your business and its continuation in the event of the death of a key stakeholder in the company. Replacing the expertise and knowledge of an essential individual can take time and money and can jeopardize the continuity of the business. A key person life insurance policy offers the following benefits:

  • Help heirs meet estate tax obligations without compromising or dissolving a family business
  • Keep the business running and assure creditors and customers that the company will operate as usual
  • Reduce the financial impact of the untimely death of a key individual by covering the expense of finding and training a suitable replacement

How Key Person Insurance works

The employer would be the owner and beneficiary of the policy. The key employee would be the life insured, but would receive no benefit from the existence of the policy. Under the “Income Tax Act” no deduction can be claimed by the employer for premiums paid under a key person policy. However, any death benefit proceeds would be received tax free by the employer and would provide the liquidity needed to hire and train new skilled individuals and provide cash flow through a period of sales decline.

Example: George Smith is the owner of a growing software company that employs 20 full-time workers. He relies heavily on Frank, his manager, to look after the day-to-day operations of the business while he is out dealing with clients and looking for new business. Frank dies suddenly of a massive heart attack. Obviously this has an emotional impact on the company but it also has a financial impact.

The “key person” life insurance policy that George has purchased on Frank’s life provides the company with a tax free lump-sum payment, enabling him to overcome what might have been a deadly blow to his business. The insurance provides immediate cash to cope with reduced profitability, resulting from his manager’s absence. There will also be funds available to pay an employment agency to find a replacement and reassure creditors that company is on solid footing.

Similar type programs can be set up to protect against a critical illness or the disability of a key employee.

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Keyman UK
Keyman UK

Hi LSM. This is a great article and explanation for the importance of key man insurance. In the UK, the picture is much the same and sadly most companies fail to see the importance of insuring their key people.

Storoszko & Associates, Tax Professionals
Storoszko & Associates, Tax Professionals

Hi Robert, I’m not totally certain of what you are stating as an issue here, but allow me to understand… you transferred your personal life insurance plan to your corporation as Key Man Insurance. By doing this, the corporation is the beneficiary, correct? The premiums are paid by the corporation to the insurance company, correct? If answers to either of the above two questions is no, you don’t have Key Man Insurance. Hopefully this answers your question, but if it doesn’t, please contact us directly for assistance in the proper reporting process. We can assist you in your financial reporting… Read more »

Robert
Robert

I recently incorporated a professional corporation and transfered an existing life insurance policy to it as key man insurance. My accountant, not a CA, wants me to take a deduction for the premiums in the corporation. I refused to keep the payout tax free; but cannot figure out where to put them in the financial statements or what to tell my wife about keeping any payout out of the hands of the taxman when she inherits the corporation. My health apparently precludes getting a new policy at a reasonable health. I was declined by a new insurer.

LSM Insurance
LSM Insurance

Thanks for the note. The premiums will depend on their ages, smoking status and type of plan. We will send you a separate email now.

Maria
Maria

We are purchasing a business which will be managed by 2 key people and set up with them being 25% shareholders. They will eventually buy us out. Accountant suggested we have key man insurance on both of them. looking for coverage in around 425,000. Pls send info thanks

joannie
joannie

i readed what key person insurance is but iam usure if this is the righty insurance for my need the bank suggest it. i have a business i am the owner i have three childern only one interest in the business i was advied to price the business now take key person insurance an if i die she have the money to pay out her brothers and run the businee the has allread run fallowing the death of one key person who was uninsurable. is this the correct method! Can the business pay this and right it off as expence!… Read more »

Jin
Jin

I am interested in obtaining a quote for key person insurance.
Thanks

Tanya
Tanya

Hello, I am interested in a quote on key person insurance. Can you please advise how much this might cost. I would be looking for a term agreement – perhaps 3-5 years?

Irena
Irena

I am interested in obtaining a quote for key person insurance. Is there a number I can call ?

Daryl
Daryl

Interested in a quote on key man life insurance for men or women age 60-65 in good health.

jefferin fernandes
jefferin fernandes

what types of life policy would one purchase for a key person?

what does a life insurance policy summary explan?

Brad
Brad

I am interested in obtaining a quote for key person insurance fo rmy small business.