Key Man Life Insurance and Tax Deductions

key man life insurance

According to a survey of 1,098 senior managers conducted recently by the American Management Association, only 14% reported that their companies were well-prepared for the loss of a key senior manager. How about your company? Are you prepared to weather the loss of a key employee on your leadership team? At bare minimum, you should consider key-man or key-person life insurance.

What Is Key Man Life Insurance?

A key man life insurance policy will protect your company from the untimely death of a valued manager, executive, sales person or owner. A comprehensive policy will also include disability insurance in the event the insured is unable to perform his or her job because of sickness or injury. Typical candidates include employees whose skills, experience, knowledge and/or contacts are critical to your company’s ongoing success.

Who Is a Key Employee?

Is there someone in your business the company can’t do without? This could be someone who the company is dependent upon for bringing in a large percentage of the revenues. But the individual can also be the person who provides special expertise that would be expensive to replace or the individual who has developed a valuable product for the company that can be patented.

Why You Need Key Man Insurance For Your Business?

In the event the key person insured is disabled or injured, benefits from the policy are disbursed to the company. They are generally used to cover any short-term revenue deficits that result from the loss of the key person’s services. Key man benefits can also be used for any expenses involved in recruiting, hiring and training a replacement.

If your business’s success depends on one or two people, including business owners and founders, you might need to protect your business with what is known as key man insurance policy. With key man, or key employee, coverage the business owns the policy, pays premiums and is beneficiary.

Should a key individual die or become disabled, the payout goes to the business. Businesses of all sizes can have a need for key man coverage, but often a small business is particularly vulnerable because of its dependence on one or two people.

Companies often buy key man insurance for the following reasons:

  • To protect the financial impact of the person
  • To ensure continuity during transition
  • To satisfy a possible requirement by financial institutions to show stability and staying power of a company

What Key Man Insurance Doesn’t Cover

As with all life insurance policies, it’s common for a key man policy to include a contestability period, usually two-years just after the policy goes into effect. If the insured person dies or is disabled during this period, the insurance provider can investigate to make sure the information submitted on the life insurance application are true.

Situations where key man insurance coverage is denied including:

  • Suicide before an initial contestability period
  • Purposeful dishonesty or misrepresentation
  • Fraud

How Much Key Man Coverage Do You Need?

Generally, if you buy a key man policy you’ll want to get as much coverage as the company can afford. Get started by shopping around and comparing rates. Get quotes that reflect costs for coverage on $100,000, $250,000, 500,000, $750 ,000 and $1 million. As with all life insurance, select a policy that you can afford and pays out the amount suitable for possible transition needs.

How Key Man Life Insurance Tax Deductible Work?

Is Key man life insurance tax deductible? Yes. Key man life insurance is typically sold as an equity-building whole life insurance policy. The company, not the individual insured, owns the policy and is the named beneficiary. In some instances, the premiums on a key man policy can be declared as a tax deduction by the company, but only if those premiums are charged to the insured individual as taxable income. To make this more attractive for the key man, companies often use the cash value of the policy as a retirement benefit carrot to encourage the valued employee to hang in for the long-haul.

By law, in most instances and with only a couple specified exceptions, the employee being covered must be notified in writing that: a) you intend to insure his or her life; b) what the maximum face amount of the policy is at issue and; c) that the company/employer is the named beneficiary of any death benefits. You, the employer, must secure that key man’s written consent.


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