Most small companies have a single point of failure.
In a company of twenty people there is usually one person whose absence would be more than an inconvenience — the owner who holds the client relationships, the estimator nobody can replace, the partner whose name is on the bank facility. If that person dies unexpectedly, revenue is disrupted at exactly the moment costs continue.
Key person insurance is owned by and payable to the business. The proceeds fund the recruitment and training of a replacement, cover the revenue gap, reassure lenders and suppliers, and buy the time that would otherwise not exist.
It is also frequently a lending requirement. Banks and SBA lenders often want life coverage assigned against a loan before they will fund one, which is how many owners first encounter it.
- Policies owned by and payable to the business
- Coverage sized to revenue disruption and replacement cost
- Collateral assignment where a lender requires it
- Buy-sell agreement funding for multi-owner companies
- Executive bonus arrangements as a retention tool
Key person and buy-sell are not the same thing.
Key person
Protects the company against lost revenue and the cost of replacing someone indispensable. The business owns the policy, pays the premium and receives the benefit. Sizing is driven by what the disruption would actually cost — contribution to revenue, replacement search and training, and the time before a successor is productive.
Buy-sell funding
Where two or more owners agree in advance what happens to a departing owner’s share, life insurance is what makes the agreement executable. Without funding, surviving owners must find the purchase price from cash flow or borrow it, or the deceased owner’s family becomes their new business partner. The agreement is drafted by an attorney; the funding is our part.
Key person, answered.
How much coverage does the business need?
A common approach is a multiple of the person’s contribution to revenue or profit, plus the realistic cost of finding and training a replacement, plus any debt that would be called. There is no single formula — the useful question is how long the company would take to recover and what it would burn getting there.
Is the premium deductible?
Generally no, where the business is the beneficiary — and correspondingly the benefit is generally received free of income tax. There are notice and consent requirements for employer-owned policies that must be met at issue for that treatment to hold. Confirm the specifics with your CPA.
Does the employee have to agree?
Yes. The insured must consent in writing and be notified before the policy is issued. For employer-owned life insurance those requirements are a condition of the favourable tax treatment, not a formality.
What happens if that person leaves the company?
The business can usually surrender the policy, or in some cases transfer it to the individual. Transfers carry tax consequences worth reviewing before you make one.
Protect the business, not just the family.
If a lender has asked for coverage, we can usually turn a quote around quickly.