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As we mentioned in previous articles, it is important that people own a business understand what is business insurance, so they can protect their business in case of any unforeseen event happened causing hardship to the business owner and their family such as business store burned down one day, if you don’t carry insurance, you would endured some hard times after that. You make sure you have insurance for anything of importance, or anything that could prevent me from earning a living. In this article we will discuss the important role of key person life insurance purchased by the company will warrant the long term stability of company’s operation and success.
A key person is one who is recognized as being essential to business success and whose death would result in substantial loss to the company.
The key person may be insured
1.to the value of 1 or 2 years income
2.the amount could represent the financial loss to the business.

Here are some characteristics of key person insurance:
1.the premiums paid are not a tax deductible expense.
2.the premiums are not a taxable benefit to the life insured.
3.dividends are not considered to be taxable income, until they exceed the ACB of the policy.
4.annual Cash Surrender Value increases are not considered as taxable income.
5.the death benefit is non-taxable when received.
6.private corporations would have the share value increased by the corporate owned (key person) insurance. Proceeds (less the return of premium) are added to the Capital Dividend Account.

I hope this information will help. If you need more information of the above subject, please visit my home page at:
http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
http://businessinsurance20.blogspot.com/

http://businessinsurance21.blogspot.com/

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Imagine a story of a business owner that found out their passion at an early age. This passion was for formal wear. Yes, tuxedos. A young entrepreneur found the desire for business, as well, at the very young age of 17 during a business class in high school. This passion led to many years of working in other people’s retail stores, then managing the stores, then one day the dream came true, the goal was finally met. After 15 years building a reputation of excellence in this field, a financial backer was willing to grant a loan to this still young entrepreneur. Thus, he was able to buy his own Formal Wear retail store.

This business had an employee that brought in a tremendous amount of revenue from doing on site customer sales. This one employee truly had an impact on the business’s bottom line. Without this employee going on site and working his magic with the customers all year long, the business’s sales would suffer greatly. This is when it dawned on the business owner that if he did not protect his “asset” a great loss to his business could occur. The savvy entrepreneur called his insurance agent and started a conversation about buying “Key Person” life insurance. This entrepreneur didn’t work all of his life to get to where he is to leave himself exposed if an unfortunate event caused him to loose such a key revenue generator for his company. He has built his life around his business and has made a smart move to find protection in a Key Person life insurance policy.

When a corporation is formed it separates the business from the actual owners. In a corporation setting there may be a highly valued employee, also know as, a Key Employee, or a Key Person. A business may want to protect themselves from incurring a loss should that Key Employee from that company die.

Key Person Insurance allows a business to buy life insurance on the life of its key employees. This type of insurance will ensure that the business can continue if that person should die. The reason why a business would be allowed to buy a policy on an employee is because the employee/employer relationship creates something called insurable interest.

This type of insurance policy covers the financial loss that the company may suffer at the employee’s death. The policy is set up that the company is both owner and beneficiary of the Key Person insurance policy.

Further, when the company pays a premium for this type of policy these payments are not deductible business expenses. Conversely, the death benefit that is received by the company from this type of policy is income tax free. Overall, as a rule of thumb, life insurance premiums are not deductible if the person who pays the premium has any direct or indirect interest in the policy or its proceeds.

There are more ways to have life insurance provide protection in your life. An insurance agent can help you understand the products offered through insurance companies. They can also give you a better picture of what product is right for you or your business’s needs.

There’s an old saying, “No-one is indispensable”. In theory, it does not matter who you are or what work you do, you can always be edged out or replaced. This even applies to the hardworking owner. As and when retirement beckons and the business is put up for sale, a buyer can come in and continue as if nothing had changed. It’s all a matter of specific skills and personality. If people are comfortable around you and you drive the business forward, you are the key person for now. Ask anyone and their immediate reaction may well be that “you” are the business. They will shake their heads and worry what would happen if you should leave. But businesses cannot be run on this basis. There should always be a plan to ensure the business can keep going if a key person suddenly disappears. Insurance is the first step, providing a buffer against any loss in revenue and covering the cost of finding a replacement. The second issue is passing on the key person’s knowledge and experience. Business continuity depends on the organization being adaptable enough to survive. This requires the training of people to take over key functions. At first, it may be sufficient simply to cover during the key person’s holidays and days of leave. But the long-term aim should be for the organization to learn all the necessary skills for continuity.

The cost of insuring a key person varies significantly from hundreds to thousands a year. It depends on a number of variables including age, state of health and the responsibilities within the organization. Young and healthy people cost less to insure when the business is starting up. Mature businesses depending on older members of staff will find the premiums significantly higher. The insurance itself is a variation of term life insurance. So, for whatever period of time is set, the insurance company will pay out if the key person is no longer available through accident, injury, disease or death. One of the most common reasons for this type of insurance is during a funding exercise. Banks, venture capitalists and other lenders often make a loan conditional on adequate insurance being put in place. This is routine in start-ups where the funding is for the people rather than the business. If one of the company promoters does die, the death benefits usually go to the lenders, repaying some or all of the capital invested. This allows the survivors to continue the business with their own investment protected.

When it comes to business insurance, it’s not the time to be sentimental or optimistic. People do get into accidents, fall ill or die. That’s life and you have to plan how the business is going to survive and recover from the loss of a key person. Blindly hoping no-one gets sick is not a good strategy.

Business insurance and training must go hand-in-hand to prepare against all the worst-case scenarios you can foresee. That way, you can keep the premiums ticking over and capture as much of the key person’s expertise before the worst happens.

Key Person insurance needs to be set at an amount that is enough, to cover any potential loss a business would suffer in the event of any of the things below occurring to a key person.

Death
Long-term illness
Disabling injury
Impactful Family Illness

If the person in your organisation is either, a key decision maker or a profit maker who has a period of service to your company it will pay to have Key Person insurance in most cases.

When considering the amount of insurance, and if it needs to be a consideration, there are so many different factors to think of.

Will current contracts the person handles continue if they were not involved
What would the expected fall in profits be with a disruption or ending of the person’s career?
Would the fall in revenue and profits be short or long-term
What would be the replacement cost and when considering this also things of the following things training,recruitment,advertising and time involved.
Does the person have shares in the business and would you face a property or real money expense?

Typically, Key Person insurance is not thought about until a real problem arises and many financial and insurance advisors now offer Key Person insurance. The advisors from clever companies are aware that if they don’t advise clients that Key Person insurance exists, legal action could occur in the future.

The global business community is now such a litigious environment that anyone involved in financial services knows to offer clients their full cache of products. Sometimes this can be seen as the advisor just trying to sell a client but the availability of products needs to be communicated.

Key Person insurance can be surprisingly affordable and like most insurance can even seem cheap in the event of needing it.

When you stop and think about the type of business you run and how complexed relationships can be you may decide Key Person insurance is something you should acquire.

In many of the large global accounting and law firms partners receive a stake in the business and sometimes even an ongoing annuity when they retire. When you stop to think how involved these executives are as senior partners the losses can be impactful and long lasting.

You will often see corporations insisting that key executives do not fly together and cold as it sounds from an exposure viewpoint it makes perfect sense.

Take a moment and think about your key people and the relationships they have built up whilst working for your organisation.

Do you have a link to most of the people they do business with and would the relationships and accounts be safe if your executive was gone tomorrow.

Many leaders these days run their businesses from a distance and this means the connection clients have is a remote one.

Even in these times of great automation and online communication people still like to deal with other people and the real dollar value of your key executives may be greater then you first thought.