Key Person Life Insurance

Key person life insurance is life insurance that a business carries on its valued and skilled employees to partially indemnify the business for the loss sustained upon the death of the key person.

Advantages

  • During the life of the key person, the life insurance may strengthen the credit of the business and may provide cash for emergency needs.
  • Upon the key person's death, the life insurance may reinforce the capital structure of the business, may pay for the cost of training a replacement, and may solidify lines of credit.

Key Person Life Uses

  • Indemnify business for loss of a key person.
  • Provide cash to pay outstanding obligations.
  • Provide cash to redeem stock owned by key person.
  • "Informally" fund Executive Benefits for key person.

How Does It Work?

 Key Person Life Insurance Diagram1

  • Employer applies for and is the owner and beneficiary of a life insurance policy insuring the key person.
  • During the key person's lifetime, Employer may have enhanced credit and cash for emergency cash needs.
  • Upon the key person's death. Employer is indemnified for the loss of the key person.

Key Person Life for Executive Benefits

 Key Person Life Insurance Diagram2

  • Employer agrees in writing to pay executive benefits upon death, disability or retirement of the key person.
  • Employer applies for and is the owner and beneficiary of a life insurance policy insuring the key person.\
  • The life insurance policy is used to "informally" fund all or portion of the key person's benefits.
  • Upon the key person's death, disability or retirement, Employer pays the promised benefits to the key person or designated beneficiary pursuant to the written agreement established between the employer and the key person. Such benefit payments are reportable as ordinary income to the recipient.
  • Employer may recover the cost of implementing the plan from the key person life insurance policy.

This information must not be used for legal or tax advice. Visitors to this web site must consult with their own legal or tax advisor for specific tax advice. This information is excerpted from Northwestern Mutual's Advanced Planning Library web site. 
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