Financial professionals

Covering key employees with key person insurance

Business man with three employees

Your employees help make your business a success. Some employees may be especially key to that success, bringing unique skills, expertise, talent and decision-making power.

Key person life insurance is a powerful way to protect your business from the potential loss of those key employees.

How key person life insurance works

With key person insurance, your business is typically the owner of the policy and pays the premiums. If you use permanent insurance, you have access to any cash values through loans1 as business needs arise.

If the employee dies, an income tax-free death benefit is paid to your business, minus any loan amounts, to help you get through a difficult time after the loss of a key employee.2

Key person life insurance can help you:

  • Protect with a death benefit: A life insurance death benefit can help your business transition after the death of a key employee.
  • Access cash values: Use permanent life insurance to build cash value that you can access through policy loans when your business needs it.
  • Add flexibility with riders: Certain available policy riders can add additional protection from events such as disability or employee retirement.

Your financial professional can help you explore key person insurance as a protection strategy for your business.

1 Loans and withdrawals, if taken, will reduce the death benefit. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. If tax-free loans are taken and the policy lapses, a taxable event may occur.

2 Income tax-free death benefits on employer-owned life insurance policies assume compliance with IRS guidelines including Internal Revenue Code Section 101(j). Employers should obtain a signed notice and consent from the insured before policy issue to help keep death benefits income tax free.

This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.

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