Life insurance is usually the cornerstone of a key person protection strategy.
It provides an instantaneous injection of capital into the business when the key person dies. The company receives death benefits tax-free. Renewable term insurance is usually the most economical option over the short-term. However, there are situations in which a more permanent insurance solution should be considered. For example when protection is expected to extend over a longer time frame, or there is a need to create a funded supplemental compensation structure for the insured person.
If the parties intend to use life insurance policy values to provide retirement income for the insured person, care must be taken to ensure that the policy will not be deemed to be a retirement compensation arrangement. If not, adverse tax consequences may apply.
The parties should speak with their tax advisors if they want to use the policy to provide retirement income for the insured person.
Key person insurance provides assurance to a small business’s creditors and employees that the business will continue even if a key person dies. The life insurance proceeds provide immediate cash to cover the business’s working capital needs and to find and train a suitable replacement for the person who died.
