When most people think of life insurance, they think of personal life insurance, but the truth is a key man policy is very important as well. A key man policy is a life insurance policy on someone who’s important part of the business. This could be anyone from owners, employees, or even stakeholders.
The purpose of this policy to not only protect the key man, but also to protect the future of the business. It’s a key person were to pass away, a key man policy would provide the financial means to help keep the business afloat during this tough time. A business in this situation would need time to recover, as well as find someone else who can step in during this tough situation. This would not only take time, but many resources which a business cannot plan for without the use of the key man policy.
This policy can also be used to help keep key employees in the business. If a specific type of life insurance policy is used, the proceeds inside the policy can be used as an employee benefit in the future for the key policyholder. This type of policy is referred to as golden handcuffs, and it is used to keep key employees in the business while also providing the life insurance protection the business needs. It is important to note that this type of policy, and any other type of life insurance policy must be agreed on by the employee you’re taking the policy out on.
The key man policy would be taken out by the business, so the business would be the owner on the key man policy. The insured under the key man policy would be what ever employee or business owner you are looking to ensure. Depending on the setup you one the beneficiary is most likely the business in the key man policy agreement.
This is the most common set up, but there’re many different ways to structure this type of agreement. Be sure when you’re working with a key policy you also talk with your lawyer or attorney to make sure all aspects are well taken care of.
Many times we are asked by those considering a key man policy if the premiums are tax deductible. This is normally not the best option, simple because the death benefit would then be taxable to the business. This would be a huge tax burden for the business which it would not be in a situation to be able to afford. This is why it is also important to speak with your accountant on this matter as well.
Now you have decided this type of protection is important for your business, so what are the next steps in applying for this type of policy? The first thing to consider is whether you want to go with term or permanent life insurance. For a simple key man policy term would be the most affordable fit, but if you want to also employ the golden handcuffs technique than a permanent life insurance policy is necessary.
This is why it is important to speak with an experienced independent life insurance agent who can help you decide which type of policy will be right for your business.
If you are looking for a quote to see how affordable this business technique can be, than our online life insurance quoter can deliver you accurate quotes in less than a minute. We represent over 50 carriers so you can be sure you are viewing all your best options. If you have any questions about setting up a key man policy for your business you can always reach out to us.