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Why Key Person Insurance is Crucial for Your Business

Thursday, April 22nd, 2010

One can easily consider insurance one of the biggest assets of a business and keeps the work machinery running smoothly. Without argument it is the employees of a company that are its biggest advantage. But every team has a leader, and this leader’s contribution to a business is invaluable. And perhaps the wise thing to do would be to guard a business against the loss of this one key person.

This is exactly what Key Person or Key Man insurance is. A safeguard against uncertainty, just as all other insurances are. It is an insurance that is meant to cover the company’s losses and tide over any financial difficulty in case anything untoward happens to this person. This insurance is available for anyone from the company’s owner, director to chief sales person, etc.

Such insurance will guard your business against death, incapacity or ill-health of those key individuals. The insurance cover is directly proportionate to the cost to company of the person in question, but the ultimate benefit is to the company. The premium paid is usually quite hefty, but is tax deductible and will cover the business under myriad circumstances including loss during extended leave of the key man, costs incurred to find a replacement. The claim however is taxable.

Though a key person insurance sounds like a win-win situation, certain things should be kept in mind;

Tax deduction can be denied if the key man owns a substantial share in the company. If the company chooses to endorse the policy to the key man, he will be liable to pay income tax on it and not the company.

Beware of double taxation if the company so chooses to forward the proceeds to the key person’s estate.

Every policy has its advantages and disadvantages. What we have to take care of is that the benefits tilt in our favor. Read the fine print. Understand the terms and conditions. Understand its tax implications. Take all things into account. If you need any help on this, please do not hesitate to request us for more information.