Ron s. gilbert

Lifecycle Financial Strategies

Key Person Insurance

As an owner or shareholder of a business, you may be relying on a number of Key people to grow and operate your company. Many businesses are built on the skills, knowledge and determination of a few key individuals whose human capital, energy, understanding and experience make them an invaluable asset to the success of the organization.

Insuring a Key Person or buying Key Man Insurance is an effective way to manage the risk and potential financial loss your businesses could experience should one of your Key People suffer a critical illness, disability or premature death.

It takes time and money to replace a knowledgeable expert or Key Person, not to mention how it will affect the continuity, sustainability and profitability of your business.

Key Man insurance - An insurance policy on a Key Person offers these benefits:

  • Keeps the business running assuring stakeholders the company will operate as usual.
  • Reduces the financial impact of losing a Key Person
  • Provides funding to find a suitable replacement.

How does Key Person Insurance work?

The business / employer would own and be beneficiary of the policy. The key person or key man is the life insured but would not receive any benefit from the existence of the policy. For a key man life insurance policy the premium is not tax deductible but the benefit is received tax free. For Key Man Disability & Key Person Critical Illness Insurance the premium may be deductible but would result in a benefit that would be taxed.

Here is an example…

Sally Jones is the owner of a growing technology company that employs 30 full-time employees. She relies heavily on Paul, her manager, to look after the daily operations of the company while she is out dealing with clients and looking for new customers. Paul dies suddenly of a massive heart attack. Obviously there is an emotional impact on the company but it also has a monetary impact.

The Key Person Life Insurance policy that Sally has purchased on Paul’s life provides the business with a tax free benefit payment, enabling her to overcome a potential disaster for the company. The money supplies immediate cash flow to cope with a reduction in profitability. There will also be money to hire a recruiting agency to find a replacement for Paul and reassure creditors that the company in on an even keel.