Key person coverage
Businesses carry insurance coverage to protect their business from the loss of property and equipment, but what about their most valuable asset — their key employees?
A key employee may be the owner, a partner, a top executive or an important member of the organization with unique talents, experience or skills that are crucial to the prosperity of the business. Key person life insurance protects the business from the financial impact of the loss of an essential employee.
How key person insurance works
- Your business purchases a life insurance policy on key employee(s) after giving notice to and receiving written consent from the key executive.
- The business pays the nondeductible premium and is the beneficiary of the policy. If your key employee dies while the policy is in-force, your company receives the death benefit, generally income tax-free.*
- Key person insurance can provide a source of income to replace profits or capital lost because of a key employee’s death.
- Death benefit proceeds can be used to fund the recruitment and training efforts to replace key employees.†
- Key person insurance gives you access to cash to help settle any loans due, or to use for other expenses or bills as the company transitions.†
- The employee’s value as a key contributor to the business is confirmed.
- If the employee holds an ownership interest in the business, they should be aware that the death benefit proceeds may cause an increase in the value of their business interest. They should consult a professional tax advisor.
- Life insurance purchased and owned by a business on the employee may reduce their overall life insurance capacity.
Read our case study: Protecting your business investment (PDF)