Key Person Life Insurance

Wednesday, October 01 at 06:15 AM
Category: Business Banking

Many small businesses are highly dependent on the presence of a key employee or small group of employees for the ongoing operation of the business. It may be an owner, partner or some other important person. Protecting the business against the untimely death of that person with some type of life insurance policy can be wise. In fact, some lenders may require such an arrangement.

Ask yourself these questions. Your answers should help determine if you may need this type of protection.

  • What would happen if one of your key employees were to die?
  • Would your business cease to operate?
  • How would your operations change?
  • Is there another person to take the key employee’s place?
  • How much would it cost to hire another person to fill the void?

If answering those questions raises any red flags, you may want to consider buying some life insurance on that key employee. Having the funds available to help run the company until a replacement is found or another resolution is determined would provide you with valuable piece of mind. The best policy could be relatively inexpensive term life insurance. The business would be the policy owner, beneficiary and would pay the premiums. If the person dies, the company receives the death benefits and can then decide on a future course of action.

Using Life Insurance as Part of a Buy/Sell Agreement

Buy/sell agreements control what happens to an ownership interest in the event of the death or disability of one of the major owners of the business. The agreements can be structured so upon the death of an owner, the business buys back his interest or the remaining owner(s) buys the interest. In most cases, buy/sell agreements include some valuation guidelines for the business.

Many companies use life insurance as a means to fund these types of agreements. For instance, if the business is valued at $3 million and one owner has a one third stake in the business, the business may buy a $1 million term life policy. The proceeds could be used to buy the deceased owner's shares on his death. Another option would be for each owner to buy policies on the lives of the other owners. There are some special tax rules that apply to corporate ownership of life insurance policies. If you are considering this type of arrangement, be sure to seek qualified legal advice.

As you hope for the best and plan for the worst, you can provide yourself peace of mind when managing your business. 

The views of this article are for general information use only. Please contact and speak with a subject expert when specific advice is needed. Find articles like this and much more in the online Arvest Biz Center.

Tags: Arvest Biz, Business Banking, Insurance
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