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Can Your Business Survive the Loss of a Key Person?

Posted by Darryl V. Pratt | Oct 11, 2018 | 0 Comments

You've likely protected your business with general liability coverage, property insurance, commercial automobile coverage, and workers' compensation insurance. But for some businesses, operations would come to a grinding halt without certain essential contributors—key persons as we call them. If your business includes any key persons, key-person insurance should be a part of your business insurance planning.

What is a key person?

A key person is someone associated with the business that provides a significant, direct economic benefit. Economic benefit not only includes profits, but also considerations such as cost savings, goodwill, credit access, and customer access.

Business owners—particularly those of a small business—are often key persons. Some additional examples of key persons are:

● A salesperson with well-established or numerous business contacts

● An employee with specialized expertise

● The inventor of the product

● A programmer who wrote the foundational code

● The owner with relationships that result in favorable credit terms

How does key-person insurance help?

Key person insurance compensates the business for any financial loss or cost incurred because the key person suffers an insurable event (death or extended disability).

1. Key person insurance provides financial security.

● Key-person insurance can bridge the gap if the loss of the key person impacts the business's revenue or affects the business's creditworthiness.

● If a buy-sell agreement is part of your business succession planning and the loss of the key person triggers a buy-sell event, key-person insurance (in the form of life insurance on each owner) funds the inside purchase of the deceased key person's ownership interests, protecting both the remaining business owners and the deceased key person's estate.

2. Key-person insurance buys your business time.

● The cash injection key-person insurance provides can keep the business afloat while a replacement for the key person is recruited and trained.

● If the key person is truly irreplaceable, key-person insurance can provide the funds that enable the business to pay its creditors, wind down the business operations, and dissolve.

Any other benefits to holding key-person insurance?

In addition to the peace of mind key-person insurance provides to business owners, the premium the business pays on key-person insurance may be deductible as a business expense. If proper notice and consent requirements are met, the proceeds from a key-person insurance payout may also be tax free. The tax implications of key-person insurance are complicated and specific to individual circumstances. It is crucial that you consult with your tax professional about this and other tax-planning strategies centered on key-person insurance before you purchase a policy or sign any documents.

Next steps

We work with businesses to evaluate business needs and goals to ensure that the overall business planning strategy is on target. If you are interested in learning more about key-person insurance and how it may fit into your business plan, call the Business Law attorneys at Pratt Law Group at (972) 712-1515 to schedule a consultation today.

About the Author

Darryl V. Pratt

With over twenty (20) of experience as a dual-licensed Attorney and Certified Public Accountant, Darryl V. Pratt has practiced law in all areas of corporate and business law, non-profit law, estate planning, probate, guardianship, asset protection planning, bankruptcy (Chapters 7, 13 and 11), real estate, and taxation.

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