Keyman insurance does not discriminate against women because it only covers the male employees of a company. Any worker, associate, or owner who significantly advances a company is referred to by this term. The goal is to aid a company that has lost money due to the death of a key employee financially.
If the business uses tax-free funds to purchase the policy, keyman life insurance is a great employee perk. The premiums cannot be deducted as a business expense for tax purposes. The money is given to the employee's family without any income tax due.
What advantages does key man business insurance offer? For information on this special kind of policy, continue reading.
1. Why Key Man Insurance Is Important
Numerous businesses, particularly those of small or medium size, heavily rely on one or two key individuals. The loss of that person will have a significant financial impact in addition to having an impact on the morale of the workforce. The owner, business partners, and key executives are examples of key employees.
A study found that about 60% of a company's sales are lost after the death of the founding entrepreneur. For two years after the loss of a key employee, the likelihood that a business will survive is reduced by 20%.
Consider the effect the loss of a specific employee would have on the success of your business when deciding whether you need key employee insurance.
2. Who Is a Key Individual?
Who a business considers a key person is not subject to any set criteria. The person who directly contributes to the company's bottom line is either an owner or an employee. They might also play a crucial role in their business.
A key man insurance policy should take into account the following individuals:
- Engineers
- personnel are difficult to replace
- product development executives
- exemplary salespeople
- C-suite executives, such as the CEO or COO of a company, partners, or co-owners
You might want to make a list of the people who work for you, what they do, and how losing them would affect the business. You'll learn who you need to buy key man insurance policies for from this review.
3. Life Insurance Options
Any life insurance plan could be designed to function as key man insurance.
Term life insurance offers protection for a predetermined amount of time, typically 10 to 40 years. The less expensive premiums typically have a term based on the anticipated retirement date.
Whole life or permanent insurance covers the insured for their entire lifetime. The cash-value account receives a portion of the premium payments. The asset's cash value grows over time, qualifies as collateral for loans, and can be used as such.
Dividends from permanent life insurance could be paid to the company. If the company decides coverage is no longer required, the policy may be sold in a payout because it builds value over time.
Keyman insurance is typically term insurance due to the cost disparity. The business must occasionally carry out an insurance review, regardless of the type of insurance you buy. The review establishes whether the business needs to modify the level of coverage for each key employee.
4. Tax Treatment of Key Man Life Insurance
Keyman insurance premiums are forked over with after-tax money and are not tax deductible. The only exception might be if the insurance causes the employee's taxable income to rise. It is best to speak with your company accountant to determine any tax obligations or benefits.
When someone dies, the death benefit of a keyman insurance policy is typically paid without incurring income tax obligations. C corporations are the exception to this rule.
The death benefit must be factored into your alternative minimum tax (AMT) calculation if you are a C corporation. Every year, you must include information in your corporate tax return about the key man coverage. The number of employees who are covered under the policy, the extent of each person's range, and whether the employee gave consent to the policy's purchase are all included.
5. Employee Tax Treatment
If the company serves as both the sole owner and beneficiary, the insured employee will not be subject to any tax consequences. If you give the employee ownership of the key man insurance policy, they might owe taxes. The insurance may be viewed by the IRS as compensation at the point of transfer.
6. What Level of Key Man Insurance Coverage Is Required?
Depending on the effect a key employee's loss would have on the business, you will need a different amount of coverage for each one. You must take into account the revenue and profit you can assign to that employee to make this decision. This includes the organization's cost structure, any "soft" value an employee provides, and the price to replace the key employee.
The most typical techniques for figuring out someone's coverage are:
- Multiply the employee's compensation by the estimated number of years it will take the business to recover from their passing.
- Percentage of revenue or profit: Multiply the employee's income or profit by the number of years it might take to find a replacement.
- Finding, hiring, and training a replacement as well as any income lost while doing so make up the total costs of replacing the key employee.
- Policies typically have a cap on the face value based on the insured person's income, whether they own a stake in the company and the corporate structure of the company.
7 .Key Man Life Insurance
The reason for the coverage differs between critical man-term insurance and regular life insurance. A typical life insurance policy offers privacy protection. Cash benefits are given to the insured's family in the event of death.
A key man insurance policy serves commercial needs. It offers protection for key employees who are essential to business operations. Should the insured person pass away, the company would receive a crucial infusion of cash.
The money makes up for the revenue loss the company suffers when a key employee passes away. The business may also use the money to pay off debt and cover the cost of onboarding new employees.
The ability of the business to compensate the employee's family for the deceased person's interest in the company is a significant advantage. This gives the family of the deceased person financial security while enabling the company to maintain control over its key employees.
You might want to look over the various business succession planning options before buying a policy. You may need to decide whether to buy and also take into account other options, such as buy-sell agreement insurance.
8. Disability insurance for key men
This policy offers money to a company if one of its key employees is rendered disabled and unable to work. A typical disability insurance plan compensates the employee for lost wages and covers medical costs.
A key man disability policy will pay for the business's lost income, the expense of hiring a replacement employee, and more. The cost of this insurance will vary according to the employee's age, overall health, and position within the company.
Activities that the individual engages in outside of work are taken into consideration. Activities that increase premiums include piloting their own aircraft, mountain climbing, motorcycle racing, and other high-risk pursuits.
9. Key Man Insurance Restrictions
Only if a key employee passes away can a company receive financial security from keyman insurance. It doesn't cover the loss of a key employee who decides to leave your business because they are retiring or wants to work for another organization.
Employees who are not essential to your company's operations and ability to make money cannot be covered by this type of insurance. Independent contractors and other non-employees used by your company in day-to-day operations are not covered by key man insurance.
10. Price of a Key Man Insurance Policy
Your insurance agent will start working on finding the most affordable policy by pulling out their keyman insurance calculator.
Your key man insurance policy premiums will be determined by several variables, including:
- Permanent life insurance is more expensive than term insurance.
- Term insurance provides coverage for a predetermined amount of time and does not build up cash value.
- Permanent life insurance policies cost more but offer more advantages.
- The cost of the policy increases as the death benefit increases.
- the overall health of the employee, taking into account their age, medical history, and family medical history
- The lifestyle of the employee, including their jobs, hobbies, and driving records
It will cost more to insure older workers or those with health problems. Consider looking at all the commercial options that Hummel Group provides. This includes business succession planning, employee health plans, commercial insurance, and financial services.
