We’re frequently asked to explain the distinctions between Key Person life insurance and life insurance used to fund a Buy/Sell deal. While they are both used in the business world to help businesses cope with the shock of a partner's death, they serve different goals.
Business continuity can be aided by proper planning in the event of the loss of key individuals who are critical to the company’s performance.
Thankfully, Key Person Insurance and Buy-Sell Life Agreements are two insurance policies designed to cover your organization from the loss of an important employee due to death, incapacity, or other trauma.
Consider your top executives, your managing partner, or even your best salespeople. Is your company/business prepared to deal with the ramifications of such a significant loss?
When Is Key Person Life Needed?
The purpose of Key Person life insurance is to protect a company if a key employee dies unexpectedly. When a key member of the team dies unexpectedly, the company may face difficulties. In most businesses, this refers to board members, CEOs, salespeople, and other essential personnel whose loss might be financially catastrophic.
A Key Person life policy allows you to replace the hole left by that individual’s absence. For example, if your top sales professional died, you'd have to employ someone qualified to fill their shoes. You may even be obliged to hire additional workers to make up for the loss of that essential employee.
Different types of insurance plans can be utilized to provide coverage. These include both temporary and permanent positions. Your firm can obtain insurance protection with a term life insurance policy. If you utilize a more permanent form of life insurance for Key Person life insurance, you’ll get both life insurance and a cash value component that can increase tax-deferred over time.
The amount of a Key Person life insurance policy is up to you, but it should be sufficient to cover expenditures such as hiring, training, and payroll expenses for the individual(s) for a certain period.
Buy-Sell Life Insurance
While a Key Person policy covers the day-to-day operations of a company, Buy-Sell Agreements cover the ownership if one of the owners dies. A Buy-Sell Agreement is funded through Buy/Sell life insurance.
An attorney drafts the Buy-Sell Agreement, which includes numerous key provisions to ensure a smooth transition of ownership in the event one of the owners passes away prematurely.
These agreements can reduce many conflicts when an owner or partner dies.
It establishes the company’s market worth.
Ensures that the deceased's family is compensated.
It binds the surviving partner to purchase the deceased partner's shares.
It requires the deceased partner's estate to sell the shares to the surviving partner.
Protects the business’s liquidity needs.
Provides the funds required to complete the transaction.
Life insurance is the best way to fund a buy-sell arrangement. This means that money is available right away in the event of a death, and death benefit proceeds are normally tax-free. Furthermore, the monies used to acquire the deceased's portion are purchased for a fraction of the cost.
Premiums for life insurance are generally not deductible as business costs. As a result, after-tax resources are used to pay the premiums, and the benefit is tax-free.
The likelihood of becoming disabled during one’s working lifetime is substantially higher than the likelihood of dying. When discussing corporate life insurance, you should all discuss Key-Person Disability and Disability Buy-Out coverage.
These products should be part of your business continuation plan
Every organization has its own system of analyzing potential hazards and selecting how to pass on leadership. Even in the face of loss, your company's health and performance may be maintained by addressing these concerns before they become a problem.
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Leap | Carpenter | Kemps Insurance Agency Can Help
Leap l Carpenter l Kemps Insurance agents and consultants have helped many businesses establish, plan, and implement successful risk management and insurance strategies. Contact us today for more information on the advantages of risk management consulting services or to schedule a consultation with a professional expert.
Dave Cribb, the Chief Operations Officer of LCK, has an extensive background in management and sales in the financial sector.
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Leap | Carpenter | Kemps Insurance Agency provides Commercial Business Insurance, Employee Benefits, Life and Health Insurance, and Personal Insurance to all of California, including Merced, Atwater, Los Banos, Mariposa, Madera, Fresno, Modesto, Turlock, and Stockton.
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