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Key person insurance

Helping your business recover from loss

Key person insurance, also called key employee life insurance, provides your business with funds to help it continue to operate smoothly after the loss of an important contributor.1

The sudden loss of a key employee who is critical to your business’ success could have significant consequences. Lost sales, decreased earnings and lower profits are only a few potential outcomes when an important person is suddenly gone from your business.

In addition to being emotionally difficult for you and your employees, this loss can also create unforeseen costs for hiring and training a replacement.

How it works

Your business is the owner and only beneficiary of a life insurance policy covering a key employee. The key employee has no rights to the policy.

If the insured key person dies, your business receives the death benefit income tax free,1 which can be used to help your company recover.

Easily transferrable

If an employee insured with key employee life insurance leaves or retires, you may be able to transfer the cash value to a new policy insuring a replacement employee without any new expenses.2,3

1 Your business must meet the Employer Owned Life Insurance (EOLI) notice and consent rules before the policy is issued. The insured employee must consent to the life insurance coverage.

2 Provided the new employee meets medical underwriting requirements and is insurable.

3 You should consult a tax/legal advisor when considering transferring cash value to a new policy insuring the life of another employee.

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Life insurance products contain charges, such as Cost of Insurance Charge, Cash Extra Charge, and Additional Agreements Charge (which we refer to as mortality charges), and Premium Charge, Monthly Policy Charge, Policy Issue Charge, Transaction Charge, Index Segment Charge, and Surrender Charge (which we refer to as expense charges). These charges may increase over time, and these policies may contain restrictions, such as surrender periods. Policyholders could lose money in these products. 

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender, and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. You should consult your tax advisor when considering taking a policy loan or withdrawal. 

This information is a general discussion of the relevant federal tax laws provided to promote ideas that may benefit a taxpayer. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. Taxpayers should seek the advice of their own advisors regarding any tax and legal issues specific to their situation.

DOFU 2-2023