Key Person Insurance
Thanks to their size, small businesses usually rely on a few key people to keep operations running smoothly. Whether it is a front-line supervisor that runs the crews, a senior leader for slightly larger business, or the founder and owner of a company, the absence of key people can really cripple short-term results which can potentially place long-term business viability at risk.
Key Person Insurance is a risk management tool that helps to cover the loss of a valued contributor due to death or disability.
What you need to know
Unlike most insurance policies the beneficiary of Key Person Insurance is not the employee or his/her family, but rather the employer. Any plan to include a staff member’s employer within an insurance portfolio should be implemented alongside insurance that would also benefit the employee or the employee’s heirs.
To insure the life of a Key Person, term or permanent insurance can be utilized. Under these plans the premiums are not tax-deductible. However, the proceeds are received tax-free and can be used to recruit and hire a replacement, pay bills and for most other obligations that might otherwise be difficult to meet after the loss of this Key Person.
In almost all cases, personal insurance should be paid with personal funds, and policies where the business is the beneficiary should be paid using corporate dollars.
The disability portion of Key Person Insurance has some interesting wrinkles. Firstly, there is typically a finite amount of time, typically one year or less, where disability benefits will be paid. Since the policy was established to assist the business in the short-term, the benefits are short-term, too. Wage-loss disability insurance benefiting an employee will usually run until retirement age, but that is not the case for Key Person Disability Insurance.
The minimum length of the disability before benefits are paid affects the premium in both cases, and is usually 60 or 90 days.
The Bottom Line
There can be unique features of this type of insurance; future insurability, waiver of premium and return-of-premium riders to complicate matters.
Jeff Devlin, CFP (2010-2022)
Elementus Wealth Management Inc.