Key Person and Partnership Insurance

This is one of our major areas of expertise and focus. We believe that Key Person Insurance is paramount to the continuity of any small/medium size enterprise and must be included in succession planning. From our experience, trading companies that give large amounts of credit to their customers will find this very useful.

Most companies have at least one employee who is key to the success of the business. Whether it's the owner, a partner, a majority stockholder, or someone with a high level of expertise, the loss or death of that person could mean financial ruin for the company. Employees are valuable assets and the loss of some key employees could significantly impact the progress of the company.

Key-person insurance protects your company's solvency in the event of losing a key employee or founder. Protecting your company from such potential disasters not only makes good business sense, but also, lenders and investors generally require that a business carries key-person insurance to protect their loans and investments in the company.

Many insurance companies require a company's board of directors to pass a resolution affirming the purpose of the business life insurance policy. Additionally, the key employee must be notified about, and agree to the purchase of, insurance on his or her life.

The business typically owns the policy, pays the premiums, and is the beneficiary. Most businesses purchase key-person insurance as a whole-life insurance policy; however, term life insurance may be more economical and can be bought to cover the key person until he or she retires. In both cases the death benefits are received tax free. The benefit of a whole-life policy is that it can be transferred to the departing employee on retirement, where the coverage can either be continued on a personal level or the cash-value cans be cashed in.

Key-person insurance benefits are often used to buy out the insured person's shares or interest in the company. Buy-sell agreements, which require the deceased executive's estate to sell its stock to the remaining shareholders, legally facilitate this process. Proceeds from key-person insurance can also be used to recruit replacement management.

The objective of key man insurance is to financially protect the company from adverse impacts if one of those key employees suddenly dies or becomes disabled. The finances available from a key man insurance policy would:

  • Provide funds to find, recruit and train a replacement
  • Help replace any profits the company may have earned had the employee not died
  • Strengthen the company’s working capital and balance sheet to help assure creditors and suppliers about the continuity of the business.
  • Help heirs meet estate tax obligations without compromising or dissolving a family business
  • Reduce the impact of the untimely death of a key individual by covering other expenses

Any agreements and insurance policies within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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