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Owning a business comes with its expenses. Not only do you need to worry about buying insurance to protect your business property and the premises where you operate, you also have to worry about buying life insurance that will help keep the company alive if a key player in the business were to die. It can be very overwhelming to start a business, and with everything you have on your plate, the idea of dealing with yet another item on your list may sound like the task that will push you over the edge. By using a comparison tool, you can easily find a plan that works for you in a time efficient way. Start comparing life insurance plans now by using our FREE tool above!
While there might be seemingly urgent matters that you need to handle day to day, you cannot put off building your life insurance portfolio for too long. You may need to purchase insurance on your own life or the life of your business partner to fund a buy-sell agreement, but another type of coverage that should always be considered is key man insurance. Key man insurance is a crucial type of protection that could be the difference between closure and keeping a business open. Like many business expenditures, life insurance premiums may be tax deductible. Read on, and learn more about how the coverage works and how key man insurance can reduce your business tax liabilities.
How does key man life insurance work?
If you are familiar with life insurance, in general, you understand that you purchase coverage to leave a death benefit to your friends or family members. There may be a long list of different reasons why you would add life insurance to your financial portfolio, but the main reason is to invest in peace of mind so that the people that you love can cover your debts and live comfortably.
Insurance that is purchased by a corporation works a bit differently. While the corporation may love you and wish you and your family the best, the purpose of buying key man insurance is to protect the company against the negative effect that your death could have. When a company purchases this type of insurance, they will cover executives and other key players in the organization that are not easily replaceable.
The purpose of the coverage is to buy the company time so that they can find the right candidate for the job.
They will also use the money to cover recruiting costs, training costs and to implement other strategies that might help save the business if it is on the verge of going under. General employees who can be trained on-the-job are not key players. To be a key player, you must have the knowledge and experience that the typical person actively seeking employment does not have.
How do you know if key man insurance is required?
You might wonder just how key man life insurance might come up in a conversation. It might sound odd for a CEO or a President to approach their upper-level employee to ask them to apply for key man insurance, but this is a normal process. In fact, after there were scandals of companies profiting from secretly insuring their low-level employees, any company that would like to insure a key man must first get permission. Some companies may even have it written out as part of the employment contract that you are allowing the company to insure you.
Who pays for the premiums?
Key man insurance should list the business as a beneficiary, but in some cases you can negotiate and ask that your family receive a small portion of the benefits. No matter how the terms are laid out, the company will pay the premiums for the coverage. They will become the party that is billed for the coverage and are responsible for keeping it active.
If the key man were to leave the company, there is concern that all of the money would be lost. This is why anyone in charge of choosing the key man policy should consider low-cost term insurance instead of an expensive cash value policy.
What should you know about the key man insurance?
If you are the party that is being asked to apply for coverage, you need to consider how the insurance might affect your ability to get coverage in the future. In some cases, being the named insured on a key man policy can affect your ability to get personal coverage because the death benefit will show under your name. If companies have strict guidelines, they may not allow you to apply for a new policy because they will feel like you are over-insured.
Another thing to keep in mind is what would happen to the policy if you were to be let go from the company. The last thing that you would want is for a company to terminate you after discovering you are ill just to find out that they are keeping the policy active and have control over it. To protect yourself, you should have a contract that says that the company must cancel or transfer the insurance to you when they no longer have an insurable interest in your life. It can be very helpful to negotiate the terms so that you are the policy owner at all times.
Are the premiums paid tax deductible?
Write-offs are almost a magic word in business. If a business expenditure is tax deductible and can be written off, the company will jump at the opportunity to lower their liabilities. Unfortunately, life insurance premiums typically are not an expense that can be deducted when tax time comes. There are some scenarios where life insurance premiums to cover a key man might actually be deductible according to the Internal Revenue Service criteria.
Premiums for individual life cover that will pay for personal expenses are not tax deductible.
If an employer is paying for certain types of employee benefits, they may be able to write-off the portion of the premiums that they pay. Since key man life insurance is not an employee benefit and instead is an employer benefit, the rules vary a bit. When a business owner buys key man insurance, they may be able to deduct some or all of the premiums if the premiums are charged to the person who is insured as taxable income. Otherwise, the premiums cannot be labeled as a legitimate deduction.
Are there tax consequences?
You might be focused on learning about the tax advantages of key man insurance, but it is also important to cover the tax consequences. In many cases, premiums are nondeductible, but it is also nice to know that death benefits will be tax-free when they are paid out. The covered party who is named as the insured will also not suffer any tax consequences unless the policy is included as part of their estate. For this to happen they must be an owner. If you have a C corporation, you should check with your tax specialist to learn about some of the tax exposures that exist.
What are the advantages of key man or business life insurance?
There are pros and cons to any type of financial decision. One obvious drawback is that the company must pay for potentially high premiums if the key man has medical problems. While costs that are not deductions are going to be a con, there are so many advantages that companies with a need should consider regardless of size. Here are some of the advantages:
- Giving business owners and investors peace of mind
- Ensuring creditors that the business is protected
- The company has the choice to insure who they feel necessary
- Freedom to choose a type of policy
- Funds paid out on key man insurance is typically not taxable
- Insurance can help retain employees
How to Buy Key Man Insurance
It can take between 4 and 6 weeks for a key man insurance application to be reviewed, underwritten and then issued. This is why it is very important to allow ample time to obtain a policy when you decide that the cost is justified. To get insurance, you must submit a formal application by phone. Once the signatures are received, the application will enter the underwriting phase like a normal policy. Most companies will require the insured to complete a basic medical exam. After the results are received, the underwriter will check medical records and then verify that the statements are honest. If there are no issues, an approval letter will be sent.
Key man insurance may be a very important part of your business portfolio. If you are in need of a competitively priced plan, you should start to shop the rates by using an online rate comparison tool. This tool will help you window shops the rates through the leading providers without having to contact them directly. After you find a good policy and a good rate, you can start the life insurance application process and then structure the policy as was agreed upon. Start comparing life insurance rates now by entering your zip code in our FREE tool below!