Protecting profits with key person life insurance

Posted in Life, Business

People are the lifeblood of any business. They’re the driving force behind production, service, profit and growth. And, unlike equipment or inventory, good people are hard to replace. When a key person dies, it can turn your business upside down.

But there is one thing you can do to be prepared: protect the business with key person life insurance.

As a business owner or leader, ask yourself these questions:

  • What would happen to your business if something happened to YOU?
  • How would revenue and profit be impacted if you lost a key person or business partner?
  • How would the loss impact the creditworthiness of your business?
  • Do you want your business to live on to sustain your family and future generations?

Don’t wait until it’s too late.
Every business that would be adversely impacted by the death of an owner, partner or key employee should consider owning at least one key person life insurance policy – maybe more.

Just as families should have life insurance policies for their breadwinners, businesses should consider having key person life insurance policies for their revenue influencers.

Here’s an example.

Sam owned a print shop with 15 employees. He personally managed the books and the company’s seven biggest accounts. Then, when Sam was just 45 years old, he suffered a fatal heart attack.

Fortunately, Sam had the foresight to make sure that his business owned a key person life insurance policy on him. The death benefit allowed Sam’s wife to hire a new president, bookkeeper and sales professional. Yes, it took three people to fill his shoes! And because she had the financial resources to stay afloat during the transition, no employees lost their jobs and the business was able to grow and thrive. Sam’s son will be able to take over the business when he graduates from college next spring.

Quiz: Is key person life insurance right for your business?
If you answer yes to any of the following questions, then it’s time to discuss key person life insurance with your independent insurance agent.

  1. Could your business be adversely impacted if you died unexpectedly?
  2. Would your business struggle to continue if you died without warning?
  3. Have you guaranteed any business loans with personal assets and, if so, could your family’s personal assets be placed at risk if you died unexpectedly?
  4. Could your business be adversely impacted if one of your business partners or executives died unexpectedly?
  5. Do any of your business managers or key executives have sole responsibility for the financial management of your organization?
  6. Could your business be adversely impacted if one of your star employees dies unexpectedly?
  7. Is it possible that your business would lose large key accounts if their point of contact died unexpectedly?
  8. Is it possible that your business would lose key or unique capabilities, competitive intelligence or proprietary processes if one of your star employees died unexpectedly?
  9. Could your company’s creditworthiness, loans or lines of credit be impacted if you, a partner, an executive or a star employee died unexpectedly?
  10. Would you be unable to finish projects or close key deals if you or another key person died without warning?

Here’s how it works.
When the business purchases an insurance policy on the life of a key employee, it pays the policy premiums and is the beneficiary in the event of the employee’s death.

In the event of that person’s death, while coverage is still in force, the business will receive the death benefit proceeds and can use the money as needed to cover lost business revenues, temporary staffing, hiring, training and other transitional costs.

A few things to keep in mind.
There are a few important things to know about key person life insurance policies:

  • Premiums are probably not tax deductible.
    Premiums for life insurance policies that have the business as the beneficiary are usually not tax deductible. This is different from life insurance purchased by the business for the employees’ benefit.
  • Employees must consent to coverage.
    According to IRC 101(j) issued in 2006, the insured must consent to being covered before the policy is issued. If they didn’t provide consent, then the death benefit could be taxable to the business to the extent it exceeds premiums paid. And that could put a serious dent in the funds. So, be sure to get – and document – their consent.
  • It isn’t a good fit for sole proprietors.
    If you’re the owner and only employee of your business, life insurance is still a good idea – but it’s your family you’ll probably want to protect. If that’s the case, a personal policy is probably a better choice. It’s simpler and you’ll probably qualify for more coverage.

Ready to protect your business from the loss of a key person? Contact your Grange Life agent.

Please note: The IRS and certain states have adopted statutes or regulations that define who a key employee is for insurable interest purposes. Please check the IRS regulations and law of the state where the business is located and/or incorporated to see if there are any insurable interest restrictions.

Life policies are issued by Grange Life Insurance Company, Columbus, OH, and are subject to underwriting approval. Not available in all states. Neither Grange Life nor its agents give tax, accounting or legal advice. Please consult qualified independent advisors for such advice. This article isn’t intended to be used, nor can it be used, by any taxpayer for the purpose of avoiding U.S. federal, state or local taxes or tax penalties. This article is written to support the promotion of the matter addressed here. For specific coverage details, always refer to your policy. If insurance policy coverage descriptions in this article conflict with the language in the policy, the language in the policy applies.


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