Key Person Insurance

Oct 23
09:19

2007

Lorne S. Marr

Lorne S. Marr

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We all know how crucial can one single person become for a company. Many businesses have been built around the strengths and skills of a few individuals whose capital, energy, knowledge and attitude makes them very valuable to the organization. Key person insurance can help to preserve the value of your business and its continuation in the event of the death of a key stakeholder in the company.

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We all know how crucial can one single person become for a company. Many businesses have been built around the strengths and skills of a few individuals whose capital,Key Person Insurance Articles energy, knowledge and attitude makes them very valuable to the organization.

Key person insurance can help to preserve the value of your business and its continuation in the event of the death of a key stakeholder in the company. Replacing the routine and knowledge of an individual can take time and can jeopardize the continuity of the business. Key person life insurance policies have been developed precisely to cover these recovery costs and offer the following benefits:

       
  • It helps heirs to meet estate tax obligations without compromising or dissolving a family business.
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  • Keep the business running and assure creditors and customers that the company will operate as usual.
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  • Reduce the financial impacts of the untimely death of a key individual by covering the expense of finding and training a proper replacement.

So how does key insurance work? The employer is the owner and beneficiary of the policy. The key employee would be the life insured, but would receive no benefit from the existence of the policy. Under the "Income Tax Act" no deduction can be claimed by the employer for premiums paid under a key person policy. However, any death benefit proceeds would be received tax free by the employer and would provide the liquidity needed to find, hire and train new skilled individuals for the organization during tough times.

Example: Alan Gregor is the owner of a growing software company that employs 20 full-time workers. He relies heavily on Thomas, his manager, to look after the everyday operations of the organization while he is out dealing with clients and looking for new business. Thomas dies suddenly of a massive heart attack. Obviously this has a significant emotional impact on the company but it also has a serious financial impact as well.

The "key person" life insurance policy that Alan has purchased on Thomas’s life provides the company with a tax free lump-sum payment, enabling him to overcome the obstacles which might have been a deadly blow to his business. The insurance provides immediate cash to cope with reduced profitability, resulting from his manager’s absence. There will also be funds available to pay an employment agency to find a substitute and reassure creditors that the company is on solid foundations.

Similar type programs can be set up to protect against a critical illness or the disability of a key employee as well. But that's for another article...