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,1,2 which can be used to help your company recover.
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.3,4
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 Subject to the corporate alternative minimum tax for C Corps.
3 Provided the new employee meets medical underwriting requirements and is insurable.
4 You should consult a tax/legal advisor when considering transferring cash value to a new policy insuring the life of another employee.
This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.
Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.
Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.