This is a life insurance policy that is purchased by the company on the life of an employee or employees whose loss would have adverse effects on the company. The objective of key person insurance is to financially protect the company from any impact or financial loss should anything happen to its employees.
Some of the benefits to key person insurance would include:
- Can provide funds to the business for the person’s loss for the time the company spends on recruiting, hiring, and training another person.
- Help replace any profits the company may have earned had the employee not died.
- Strengthen the company’s working capital and balance sheet to help assure creditors and suppliers about the continuity of the business.
Key person insurance is set up so that the company is the owner of the policy and the beneficiary upon the death of the key employee. Since the company is the owner, it is also responsible for the payment of the insurance premiums. Premiums are not tax-deductible; therefore, the death benefit is received tax-free.