Suppose you have a key person in your company you consider an essential member of your team. Now suppose that key person leaves the company, passes away, or suffers a critical illness. Your company could suffer financially due to losing this person’s expertise, due to incurring recruiting expenses, and even due to loss of confidence with clients. In order to protect your business from unexpected expenses if one of your key employees leaves your company, Key Person Insurance Protection should be purchased. To do this, your company would first purchases life and critical illness insurance policies on the key person in your company, and then if this key person leaves the company, passes away, or suffers a critical illness, payment of the policy benefit would be triggered in an amount sufficient enough to cover the cost of losing his or her services.
Since every company or business is unique, there are several different types of key person protection available. A preferred term life insurance policy is usually the best way for companies to meet their immediate needs for financial protection at low premiums. The term selected is based on the expected period of employment and age of the key person being covered. Other options include purchasing a permanent life insurance policy on a key person, where policy payments would be higher but companies would accumulate tax-preferred cash values inside the policy. In this manner, companies could use the tax-preferred cash values accumulated towards a life insurance shared ownership agreement, a supplemental executive retirement program, or a retirement compensation agreement.
If your key person survives a critical illness but does not work as effectively as before the illness, key person protection can also protect your company or business from financial losses. To do this, you can purchase a critical illness insurance policy on your key person, and your company would receive a lump sum payment if this key person survived his or her critical illness. For added financial protection, your company can be reimbursed up to 100 percent of the premiums paid if your key person does not survive the critical illness while the policy is in force or if you cancel the policy.
Speaking with CRS Financial is your best bet in determining what protection best suits your company and to discuss the tax issues that accompany retirement planning strategies through tax-preferred cash values.