The United States has 30.7 million small businesses, which account for 99.9% of all businesses in the U.S. A small business has less than 500 employees. Keeping these businesses operational is important considering they create about 1.5 million new jobs every year.

One of the most important factors in making sure a business stays operational is taking steps to accommodate the loss of a key employee, owner, or partner. Key person insurance serves this purpose. Key man, key person, or keyman insurance are all terms used for this special type of life insurance.

If you own a small business or are self-employed, you may be wondering what this insurance is and if your business really needs to purchase it. We are going to share who needs key person insurance, how it works, and who the owner and beneficiary are.

What Is Key Person Insurance?

In a small business, the owner is crucial to the everyday operation of the business. There may also be other key employees the business relies on heavily. If any of these people die or become disabled it will have a tremendous impact on the business.

The impact is so great that businesses are often unable to continue and close. Key person insurance coverage is designed to provide financial assistance to the business, helping it survive this unexpected impact.

When you consider what business insurance you need, purchasing a key person life insurance policy needs to be at the top of your list. Owners, partners, employees who are significant in operating the business, or even top salespeople need key person insurance.

The business purchases and is the owner of the policy. The company pays the premiums because they are who will benefit from the payout if the employee dies or becomes disabled.

How Does Key Person Insurance Work?

The company is the beneficiary of a key person life insurance policy. The business can use the insurance money where they need it most. This may be paying business expenses, hiring a replacement person, and paying off company debt.

If a determination is made to close the business, insurance proceeds the company receives may fund severance pay to employees and finance the closing of the business. The beauty of keyman insurance is that it provides those in the business with options that prevent bankruptcy.

Who Is Key Person Insurance For?

Do not confuse key person insurance with personal life insurance. You need to purchase personal life insurance to provide for your spouse and children in the event of your death. Key person insurance keeps your business operating in the event of your demise.

Your family members will not personally benefit from key person insurance. The benefits your family receives are if the insurance prevents the business from closing. Your family may benefit from the business serving them as a viable source of income.

Does My Business Need Key Man Insurance?

If you are operating a business as a sole proprietor, partnership, or own a company in which the unexpected death of specific key employees would create a financial hardship on the business, you need key person insurance. We invite you to learn more about our business insurance plans.

Hummel Group has a focus on making sure all insurance policies we sell are the best option for the client. We have experience in working with every size of business from sole proprietorships to large corporations. We will analyze your situation and advise you who we recommend within your business you should cover with key person insurance.

You are welcome to request an insurance quote by calling (330) 684-5922 or request a quote online. Don't wait until it is too late, call today!

Many businesses have learned the importance of having a key man insurance policy for their owners and other key personnel. You are probably wondering if you can include the policy on your tax deductibles list for business owners.

Do not assume this is a business expense. You must be aware of how the IRS views this type of policy. You must comply with all requirements of the Pension Protection Act of 2006.

If you own or are planning to purchase a key man insurance policy, read on to learn its impact on your business taxes.

Key Man Insurance Legal Obligation

This type of life insurance is different than any other policy. The business is both owner and beneficiary of the policy. The employee does not have rights of ownership, but the company must advise the employee of their intent to purchase insurance.

This includes notification of all details of the policy. The business must also receive the employee’s written permission to purchase.

Your businesses must also file Form 8925 Report of Employer Owned Life Insurance Contracts with your yearly taxes. This provides the IRS with information on how many key person insurance policies your company has at the end of each year.

Insurable Interest

For a business to purchase a key man insurance policy the business must demonstrate an insurable interest in that employee’s life. To meet these qualifications the employee:

• Has special skills the business is highly dependent on
• Generates a substantial portion of revenue for the business
• Business reputation is linked to the individual’s name
• Business partners wish to buy out the ownership portion of a partner who dies
• The business has debt that will be difficult to pay if the key individual is disabled or dies
• Business is seeking either investors or a loan that requires key person insurance on the firm’s main leaders

If the person who the business wishes to purchase insurance on meets at least one of the above qualifications, they will be able to obtain a policy.

Key Man Insurance Policy Tax Help for Business Owners

For many years both the IRS and the federal government have been encouraging businesses and individuals to buy life insurance for financial security. The main inducement is that death benefits are payable to the beneficiary tax-free. Because the payout is tax-free, premiums are not tax-deductible.

The directive on this is IRS Section 264(a)(1) which states that business deductions are not allowed on any endowments, life insurance, or annuity policies if the taxpayer is a beneficiary of the contract.

The IRS addresses this in the Pension Protection Act of 2006, which applies to all employer-owned life insurance purchases made after August 17, 2006. The code prevents corporations from purchasing key man insurance on employees who are not key persons.

This directive is found under IRC Section 101(j)(1) and specifies that death benefits on employer-owned life insurance are taxable if it is in excess of the premiums paid. This does not apply if the policy meets one of the exemptions in IRC 101(j)(2). If the business purchased the policy prior to August 17, 2006, it is grandfathered in and is not subject to these rules.

The Answer to Is Key Man Insurance Tax Deductible?

Purchasing a key man insurance policy is a benefit to the company, but because they will obtain a tax-free payout in the event the employee dies or is disabled, the premiums paid are not tax-deductible. This insurance does provide peace of mind that the business will be able to continue operations in the event of the unforeseen incident of one of its key persons.

We at Hummel Group are committed to providing our clients with insurance that best fits their business needs. Contact us for a free quote on any business insurance needs you have.

Whether you are planning to start a business or already have a successful business, one of the main concerns is business insurance costs. Every business has its unique needs, making it difficult to estimate the cost without contacting an insurance agent for a quote.

One area often overlooked by business owners is the benefit of key man insurance. This insurance policy is crucial to the financial security of the business.

Key man insurance is life insurance owned and paid for by the business. The business is also the beneficiary. The purpose of the insurance is to keep the business running in the event a key person dies or becomes disabled.

Read on for everything you need to know about the costs of adding this highly important insurance to your business budget.

Coverage for Business Expenses

When you or a key employee dies or suffers a disability, the insurance policy benefits your business with a payout that helps cover profit loss, debts, and the cost of hiring a replacement person. In the event a decision is made to close the business, benefits may fund employees' severance pay and business closing costs.

Do not confuse key person insurance with life insurance. On personal life insurance, you designate your spouse or children as the beneficiary upon your death. The only benefit key insurance is to your family is if it keeps a family business running to provide them a source of income.

Key Man Policy Costs

The cost of your key man insurance depends on various factors regarding your company. The main factor is the type of policy and amount of coverage you purchase.

The least costly and most basic form of insurance pays benefits only if the insured person dies. Businesses can choose broader-ranging policies that will pay benefits if the insured becomes severely ill or disabled. Additional coverage increases the cost.

Permanent or Term

You have the option of purchasing a term key person insurance policy or a permanent policy. A term policy only pays if the death or disability happens during the time designated in the policy, usually 10-30 years.

At the end of the term, you will have the option to renew. You also have the option to upgrade from a term policy to a permanent policy.

Coverage under a permanent policy does not expire. These policies usually cost 5-15 times more than term life insurance.

Coverage Limit

The coverage limit designates the maximum benefit the insurance company will pay if the key person dies or incurs serious injury or illness. The higher the benefit, the higher the premium.

Determining the amount of coverage necessary depends on the size of your business and the key person's contribution to your bottom line. Ask your insurance agent for recommendations on policy coverage. Compare prices for amounts such as $250,000, $500,000, $1 million, etc.

Age, Gender, and Health of Key Person

This is life insurance, and cost variants depend on a person’s age and medical conditions. Cancer and heart disease are two important factors. Insuring older persons or those with health issues increases premiums.

Company Size, Type, and Structure

Your agent will consider the key person’s contributions to business operations and the type of business you operate. Premiums are higher for employees whose loss will have a significant impact. They will also consider if the industry has a higher risk of disability or premature death.

Determining Your Business Insurance Costs

Now you know what determines your business insurance costs for key person life insurance coverage. The important thing is not to overlook this important factor for providing security to your business.

We at Hummel Group are committed to making sure you purchase the appropriate insurance for your company. Contact us today for a free quote at (800) 860-1060.