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What Is Key Man Life Insurance?

Key man life insurance, also known as key man (or woman) life insurance, is a life insurance policy a business buys on behalf of a key executive, partner or worker. The business pays the premiums for this coverage, and is also the beneficiary for this policy. If the insured person dies – if the key man or woman passes away – the business will receive a death benefit.

Think of the definition for key man insurance as a policy that a company would purchase concerning members of a business who are irreplaceable. For example: Some employees are so indispensable – they are the key men and women, without whom a business would suffer a huge financial loss or cease to operate entirely – that the payout from this type of life insurance could resolve corporate debts, absorb the expense of recruiting a new worker, partner or executive, and lessen any other monetary losses.

A company can even use the death benefit to buy out a late partner’s stake in the business with Key Man Insurance.

How Much Does Key Man Insurance Cost?

The premiums a business pays for key person life insurance coverage are the result of the insured party’s age, medical status, health history and many other factors, in addition to the term period and specific amount of key man (or woman) life insurance a company chooses to buy. But, don’t worry about the cost because we will help you shop and find the best key man life insurance rates from over 40 life insurance companies.

It is important for a company interested in purchasing key person life insurance to evaluate premiums and quotes involving different amounts of key man life insurance costs. A business needs to be mindful of its budget, and use a key man life insurance calculator, to determine how much money a company would need to attract and hire a new worker – without having problems paying the premiums, or accumulating more debt in general.

With regard to the payout of a key person life insurance policy, a business may also split the premium and the death benefit between itself and the spouse of the key man or woman. This arrangement provides a replacement income to a family, following the death of a breadwinner or the sole source of financial support for a household.

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Local Life Agents works with over 40 carriers that offer Life Insurance Polices for Key Employees.

Tax Treatment

Since the proceeds of most life insurance policies are tax-free payouts to a named beneficiary, there is no allowable deduction for premiums paid during the course of a policy. The IRS addresses this issue in Section 264(a)(1), which states that there is no deduction for premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is – regardless of the circumstances, or the specific dollar amount – a beneficiary under the terms of a life insurance policy or contract.

For key man (or woman) buy-sell life insurance agreements, or business-owned life insurance policies, Section 1.264-1(a) states that the premiums a company pays for life insurance on behalf of any executive, worker, officer or person with a financial interest in that company are not deductible where the taxpayer is the beneficiary. The IRS does not permit deductions of key person buy-sell life insurance as an expense, period.

Who Is the Beneficiary

When structuring policies where a business is a beneficiary, it is crucial to have an experienced, independent life insurance professional overseeing this process.

Policy Owner is the Employer

Policy Insured is the Employee

Policy Beneficiary is the Employer

The Key Questions

When reviewing key person life insurance, a separate set of key questions often arises that a business should analyze with the help of an independent life insurance professional.

Since every business is different, and because the fallout following the death of a key partner, executive or employee would have different results for each respective company, there are questions of varying importance for every organization that seeks to buy key person life insurance.

The first question involving key man life insurance, despite the differences among so many companies, is the most universal: What would happen if a business lost a key person, a partner, executive or worker?

The loss, though it would vary and presumably be larger (in sheer dollars) for a more established corporation than a small firm, would nonetheless be significant. With that fact in mind, a business must have a strong answer to this next question: How much revenue would a company lose during the period it would take to find another person to fill this key role?

Whatever that sum is, it should be a figure that is as accurate as possible because, without enough key person life insurance coverage, a company can go out of business very quickly.

All of which brings us to this final question about having enough key man (or woman) life and disability insurance: Are qualified candidates available to properly fill a late partner’s responsibilities?

If those candidates are not readily available, or if finding such a person requires more time and effort, then a business should ensure it has sufficient key person life insurance to survive.

The Advantages of Local Life Agents

Local Life Agents works with over 40 carriers that offer life insurance policies for key employees.

We have exclusive resources that allow us to quickly find a variety of relevant options, to protect your business against the sudden passing of an executive, partner, worker or owner.

Our independence is our greatest asset because it gives you a clear cost comparison among different key man life insurance companies, so you can pick the best policy for your business.

Local Life Agents is your guide, from start to finish, ensuring this process is convenient and successful. Also, check out our buy sell life insurance options here.