Also known as corporate-own life insurance ( COLI), key man life insurance provides an employer with temporary life coverage at a discount rate. It s designed to assist the employer recover from the expense of a terminated employee who adds significantly to the employer s total assets, if his death would reduce the value or productivity of the business. A typical policy will pay a lump sum, life settlement, or both upon a employee’s death. If the death occurs during or just before the policy expires, the employer may choose to use the policy as is, with the death occurring shortly after the policy has expired. This option allows the employer considerable flexibility and can be a good choice for businesses where the probability of a key man dying is remote. It also gives employers a great deal of peace of mind while waiting for a key man to pass away.
One of the best ways to determine which type of policy is right for your business is to determine whether your business consists of one or more key men. A business may purchase permanent or term key man life insurance policies, but it is generally better to purchase them together, using a business exchange rider. A business exchange rider is an agreement between the employer and the employee that allows the latter to purchase a key man life insurance policy through the business. This allows the premium to be spread across multiple individuals instead of being paid out to one individual. By purchasing a key man life insurance policy that is purchased along with a business exchange rider, the premiums are spread over multiple employees, providing the maximum benefit to all the key men on the payroll of your company.
Permanent key man life insurance policies are usually purchased to cover a single senior executive, or an entire team of executives. Because they are usually purchased in groups, they will cost less than the premiums for individual policies. In exchange for this price savings, however, the policyholder will receive enhanced benefits in the event of his or her untimely death. These enhanced benefits will include: adjustable death benefits, end-of-life benefits, and a terminal cash value option. If the death of any key man occurs during the period of his or her policy, the policy will pay out the equivalent of the death benefit.
Another reason to buy permanent key man life insurance coverage is to protect your business need for life coverage. If you anticipate that one or more of your key employees will develop chronic medical conditions that require specialized medical attention, you may need to pay out a significant amount of money in taxes each year. If your business is in fact a small business, you could even be subject to state and/or federal income taxation. If you do not purchase the key man insurance required to keep your business legally operational, you could be forced to seek financial hardship relief from the state to recover the tax penalties that you owe.
Key man life insurance policies come with a variety of unique features designed to protect the interests of both the business owner and his or her employees. For example, the beneficiary will receive an account that will be used to pay the costs associated with the special needs of your key employees. As you can imagine, if an employee develops an illness or other medical condition, it can be expensive to provide that person with the type of medical care that he or she requires. The beneficiary of your plan will be reimbursed by the business for all medical expenses that he or she has incurred as a result of being a key man.
Another key feature of these types of plans is that they will often provide funds to your beneficiary that are paid out on a tax-deferred basis. This means that your beneficiary will never have to repay the full amount of the premium paid by him or her if the beneficiary passes away. This tax deferment can be helpful in situations where an employee’s dependents do not have enough saved up to provide funds to support them in their own funeral and final expenses. If a key man life insurance policy is the best option for protecting your employees’ lives and future financial futures, then it should always be part of your overall business insurance policy portfolio.
In addition, a key man life insurance policy will also allow you to take immediate action to eliminate your death benefit should your employee pass away. Often, death benefits will only remain for a limited time period after which they must be repaid or terminated. By paying the necessary premiums and receiving a cash death benefit, you will be able to reduce the immediate impact that your employee’s death has on your business. Additionally, you will be able to provide your key man employees with the proper death benefit they are entitled to, while also protecting your own finances in the long run.
In short, if you own a small business that involves a lot of risk, then you may want to consider purchasing key man life insurance. However, before you make this important decision, you should consult an experienced agent to discuss the details of this type of policy. Also, before you purchase coverage for your key people, you may want to speak with your Small Business Administration representative about your applicable State Insurance Requirements. Because there can be such high costs associated with a large number of employees, you will definitely need to purchase this important type of coverage.