Many small businesses rely on one or two important individuals to maintain daily operations and, in some instances, keep the business afloat. What would happen if this key person should become ill or pass away? Keyman insurance is an option to consider if this person’s absence would cause major financial harm to the company.
What is keyman insurance?
Keyman (also known key person) insurance is a life insurance policy the business purchases on the life of the owner, founder, top executive, or another individual who is key to the function of the organization. The insurance is also available as disability coverage in the event the person is incapacitated and unable to work.
How does keyman insurance work?
A company purchases insurance on a certain individual, pays monthly premiums, and serves as the beneficiary of the policy. In the event of the person’s death, the business receives the benefits (versus surviving partners.)
Funds may be used to cover the cost of recruiting, hiring, and training a replacement. They may also protect profits by offsetting lost sales or income caused by the cancellation or delay of a project or operation that the deceased person was involved with.
Keyman insurance offers protections for partnership interests, shareholders, banking facilities, and business loans.
If the business closes, keyman insurance may be used to pay debts, provide severance to employees, payoff investors, and properly close the business.
What are the types of keyman insurance?
Keyman insurance is essentially a life insurance policy, and choices include a simple term life policy, an indexed universal life policy, and a traditional whole life policy.
“Keyman insurance is often overlooked in business succession planning because it isn’t required like other types of insurance. However, it can be a very important tool for business owners to consider when developing a business succession plan,” said attorney Brian Grant, who specializes in estate planning law.
How much does key man insurance cost?
Policy amounts vary depending on the size and type of business. Term life is usually less expensive, and costs depend on the person’s overall health and age.
Is keyman insurance tax deductible?
The IRS does not allow for deductions on premiums paid for a life insurance policy.
Should I incorporate keyman insurance in my business succession plan?
Yes, you may wish to consider purchasing keyman insurance when building your business succession plan. For more information on the essential tools of business succession planning, please call the attorneys at O’Reilly Rancilio at 586-726-1000 or visit our website.