Management & Key Person Retention Training Portal

Help Business Owners Protect their Most Valuable Asset with Key Person Insurance

What You Need to Know

What is Key Person Insurance?

Key person insurance is life insurance on a key employee in a business.
Small or large, most businesses have several “key employees,” including
the owner or partners, the founders, and/or one or two employees who are
top performers. Key person insurance provides the business with a source
of funds when needed most— at the death of a key employee.

Who is a “Key Person?”

He or she could be a business owner or partner, a manager or salesperson, an engineer or CFO. A “key person” can be anyone whose unique skills, client relationships, or financial stake in the business would be difficult to replace. By insuring against their deaths, business owners can protect the business from potential losses or interruptions from the death of an owner, partner or other critical employee.

Proceeds from Key Person insurance can be used to:

Hire and train new personnel
Meet debt obligations
Smooth out cash flow irregularities
Help compensate for revenue lost due to a key person’s death.

Other benefits of Key Person:

Allows the policy’s cash value to be carried as a company asset
Offers the flexibility to give the policy to a key person upon retirement
Creates confidence among banks, creditors and partners that, despite a key person’s death, the company will operate uninterrupted

The Advantages of Key Person Insurance

Key Person Insurance can be structured with flexible options that provide benefits for both key employees and the business. Business owners often find this solution attractive for many reasons:

It’s simple.

Life insurance provides an easy way to create funds should anything happen to your key employee.

It’s cost effective.

Since the business owns the life insurance policy, its cash value is carried on the firm’s books as an asset.

It’s flexible.

At the retirement of the key employee, the business could choose to give the policy to the employee. It could even give the policy to some employees, but not others.

It creates confidence.

Banks, creditors and valued partners can be assured that the business will continue uninterrupted in the event of the insured’s death.

What Your Clients Need to Know

It’s the one way business owners can produce the desired amount of cash at the precise moment it is needed — upon the death of the company’s top performer.
It provides funds that can be used for any reason — including paying off loans, hiring and training a replacement, meeting expense obligations, and redeeming the business interest of a deceased owner.
It can help assure banks, creditors and valued partners that the business has the potential to continue operating in the event of the insured’s death.
It can be structured with flexible options that provide benefits for both key employees and business owners.
It can help business owners avoid a “key person discount” in a business valuation situation (where the value of a business may be reduced due to the loss of a key person if no life insurance is in place to hire and train a replacement in a timely fashion).

Here’s how Key Person insurance would work for your clients:

With the key employee’s written consent, your client purchases a Mass Mutual whole life policy on the employee’s life. The face amount
will be an estimate of the cost of losing the key employee (subject to underwriting limits), and should include funds to maintain company operations and hire a replacement.
Your client pays the premiums and receives the death benefit. Also, the employer owns any cash value — which will appear on the company’s books as an asset.
If the employee dies, your client receives the death benefit income
tax-free. This money can be used to offset losses due to decreases in productivity/sales or provide funds to recruit and train a suitable replacement.

Key Person Client Portrait

For your business owner clients, their top employees are the lifeblood of their business. That can pose a significant risk — because if a key employee should die, their business can suffer financially. You can help protect your clients by introducing them to key person insurance.

Clients at-a-Glance

Employer Profile:

Owners of businesses organized as C-Corps, S-Corps, Sole Proprietorships, Partnerships, or LLCs
Employers of executives who are already your clients
Business associates of those business owners you already work with

Employee Profile:

Ages: 30-65
Status: Key contributor to the success of the company

Examples Where it’s Good to have Key Person Insurance:

Any business where revenue and growth rely heavily on a few people is a good fit for key person insurance.

An independent bookstore is popular in the local community largely because of the owner’s reputation.

A software company relies heavily on its top salesperson for revenue.

A top executive brings specialized industry expertise to a pharmaceutical company.

Where can you find these clients?

Your own client book of business is a great place to start.
Additional ideas include:

- Business owners in your community —
where you live, work and do business with merchants and service providers
- Employers of executives who are already your clients
- Business associates of those business owners you already work with

Questions to Ask Key Person Insurance Candidates

Asking certain questions — such as the following — may help your clients discover their need for key person insurance:

What’s more important to your business — its tangible assets, such as buildings and equipment— or the top people who help make it successful?

Do you have partners, executives, managers, or sales people who make substantial contributions to your business’s bottom line?

What would happen to your business should any of these key people (including you) were to die?

If a key employee should die, would you have to hire and train a replacement Would your business suffer productivity and revenue losses?

Once your client recognizes the need for this coverage, it’s important that you both take certain factors into consideration, such as:

How much insurance coverage will your client need?

The amount will vary, but some factors that can help you and your client identify the appropriate policy face amount include:

The potential effect of the key employee’s death on the business’s loss of revenue and profits
Business debt obligations directly impacted by the employee’s productivity
The cost to hire and train a replacement
Some multiple of the key employee’s present salary

Tax Considerations

The business owner should consult his or her tax professional for guidance, but some general guidelines you and your client may wish to keep in mind with respect to how key person insurance can affect the taxes of your client’s business include:

Life insurance premiums are not deductible by the business.
Insurance proceeds are received income tax-free by the business.
If the business is a C corporation, the death proceeds and cash value increases could, in certain cases, be subject to alternative minimum tax.
In pass-through entities such as S corporations, LLCs and partnerships, the death proceeds increase the basis of the owner’s business interest. Premium payments, policy

Protecting the income tax exclusion for the death benefit

In order to protect the income tax exclusion for the death benefit, there are four general requirements:

Notice must be given to the insured, and her or his consent for the coverage obtained;
Either the insured must fit into certain categories, or the proceeds must be used for certain purposes;
There must be record-keeping; and
Reporting to the IRS concerning these policies must be completed using IRS Form 8925.

Key Person Insurance in Action

Client: John Roberts, owner of Monaco Manufacturing, a small medical device manufacturer.
Concern: If John’s chief engineer, Frank Stevenson, were to die, the business could suffer greatly.
Impact of key employee’s death on business: It would take time to find a new engineer as talented and experienced as Frank; in the meantime, the business would be unable to fulfill customized orders.

To protect the business:

With Frank’s permission, John purchases a $1,500,000 Whole Life 99 key person policy on Frank’s life.
The policy has an annual premium of nearly $22,500.
The death benefit will protect Monaco Manufacturing should anything happen to Frank.

Real-life key person stories

Companies of any size can benefit from key person life insurance, as the following two examples illustrate:

How the sudden death of a key employee impacted “the golden arches”

No business is immune from the loss of a key employee. Case in point: McDonald’s. The day former Chairman and CEO of McDonald’s, Jim Cantalupo (age 60), died suddenly of a heart attack, McDonald’s stock lost nearly 3% of its value — despite the stock being in the midst of an upswing in price.

The effect disability can have on a business

When Apple co-founder Steve Jobs announced his resignation in August 2011 due to his battle with cancer, Apple’s stock dropped 5% that same day. Prior to his resignation, the mere mention of Jobs’s health status routinely influenced Apple’s stock price, positively or negatively.

Small businesses today face a wide array of risks. Fortunately, you can offer them the tools they need to help protect against the death, disability or resignation of a key employee.

Downloadable Key Person Resources

PRODUCER GUIDE

Everything you need to know about writing Key Person, all in one place.

Download the Guide

CLIENT PORTRAIT

Which companies represent the “sweet spot” for Key Person business?

Review the Portrait

POCKET GUIDE

A step-by-step resource to help prospect, prepare and implement Key Person business.

Access the Guide

FR SPOTLIGHT

Tips from a leading producer on identifying and closing Key Person prospects.

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Downloadable Key Person Marketing Resources

Consumer Guide

Everything your client needs to know about Key Person, all in one place.