Key Man Insurance

This insurance, also known as key person insurance, is a life insurance policy that a business purchases on the life of an owner, top executive, or another individual considered critical to the company’s operation. If that person unexpectedly passes away or becomes disabled, the company receives the insurance payouts. These funds can be used to cover costs of finding and hiring a replacement, paying off debts, or providing financial stability during the transition period. This insurance helps protect a business from potential financial losses and ensures continuity in the face of losing a crucial team member.

While both key man insurance and personal life insurance provide a death benefit, they differ in several important ways. The primary difference is ownership: with key man, the business owns the policy, pays the premiums, and is the beneficiary. In contrast, personal life insurance is owned by an individual, who pays the premiums and names personal beneficiaries. This insurance is specifically designed to protect a business from the financial impact of losing a crucial employee, while personal life insurance aims to provide financial security for an individual’s family or dependents. Additionally, this specialized insurance may offer special features tailored to business needs, such as coverage for business loans or buy-sell agreements.

Determining the right amount of insurance coverage depends on several factors specific to your business. Consider the key person’s direct financial contribution to the company, the estimated costs of replacing them, and any outstanding debts or obligations that might be affected by their loss. Some common methods to calculate coverage include multiples of the key person’s salary (e.g., 5-10 times their annual compensation), the projected revenue loss during a transition period, or the cost of any outstanding loans or commitments. It’s also important to consider your company’s size, industry, and growth plans. Our UCCU agents can help you assess these factors and recommend an appropriate coverage amount tailored to your business’s unique situation.

The tax treatment of the insurance can be complex and depends on various factors. Generally, premiums paid for key man insurance are not tax-deductible for the business. This is because the business is both the owner and beneficiary of the policy, and the IRS views these premiums as a capital expense rather than a necessary business expense. However, there can be exceptions in certain circumstances, such as when the coverage is part of a buy-sell agreement. It’s important to note that while premiums aren’t typically deductible, the death benefit received by the company is generally tax-free. As tax laws can be complex and subject to change, we recommend consulting with a tax professional for advice specific to your business situation.