Key Person Life Insurance

This is Alexander. He is the CEO of one of the pioneering companies in the US. He has the vision and is considered an astounding asset to the company. That’s why the company wants to purchase key person insurance for Alexander. Now Alexander is wondering. 

What is key person insurance? Is it the same as life insurance? Stick around till the end of this article if you would like to know more about key person insurance and how it works. So, let’s clarify this situation. Life insurance is used by individuals who want to look after their loved ones after passing away. On the other hand, organizations purchase key person insurance, which would provide protection similar to life insurance.

Key person insurance is also referred to as keyman insurance or business life insurance. It’s a type of life insurance that covers a business owner or a high-ranking executive such as a CEO. The covered person is usually vital to the company’s operations and revenue generation. In case this key person passes away or becomes disabled, this insurance would make sure that the organization is compensated. 

This would make sure that the business has the financial means to stay alive. Most businesses prefer buying term life insurance as it would want to cover a specified amount of time only. Now, let’s talk about how key person insurance works. 

When a company buys a life insurance policy to cover the key person, that company is the exclusive beneficiary of that policy. That means that the company would receive the death benefit of the insured person. The insurance premiums are paid by the company. That is assuming that the insured individual agrees to the policy. The death benefit received by the company can pave the way forward for that business. This can include hiring and training a new business leader to take the place of the deceased key person. 

Business loan payments can also be handled through the death benefit. If the company wants to close, the death benefit can aid with paying the employees the severance package. Now, another big question. What is the cost of key person insurance? This is very similar to the pricing criteria or ordinary life insurance. Factors such as type of coverage and amount of coverage are very important. 

Other factors such as age and health condition of the covered person are very important as well. Young and healthy individuals are less expensive to insure than older people or individuals with a history of health issues. But at the end of the day, not every single company needs key person insurance. Small companies tend to need key person insurance as multiple business functions are handled by fewer key people. For example, owners can handle bookkeeping, hiring, sales, marketing, and other functions needed for the business. 

When it comes to tax, key person insurance is not deductible. The IRS does not see life insurance premiums as a necessary or ordinary business expense. That’s why premiums must be paid out-of-pocket.