Key Person Insurance

MR. WATSON: Key-Person Insurance

MR. WATSON: "A key person is anybody in an organization whose contributions to the operations and success of the business is essential." It's anybody the business owner says it is.

MR. WATSON: "We can use a life insurance policy on a key person for business indemnification."

MR. WATSON: I own a taco stand and this woman makes me a lot money. She is a supreme taco maker. If she dies, I will have a huge problem.

MR. WATSON: So my business buys a key person policy on her.

• The business is the owner,
• the premium payor, and
• the beneficiary.

Should she die, the business would receive a sum of money until it could bridge the period necessary to find and train a worthy successor. A whole life policy is generally used. The cash value would be listed as an asset on the business's balance sheet. The cash value could be used as a reserve fund. It is an asset. This is very important.

MR. WATSON: Is a key-person plan an employee benefit?

STUDENTS: No.

MR. WATSON: No way, it is not an employee benefit. Who's it for? The employer. Who is paying premiums? Employer. A lot of businesses have this. Can you tax-deduct that?

STUDENTS: No.

MR. WATSON: No, It isn't C, B, or G.: You cannot tax-deduct the premiums.

MR. WATSON: But the death benefit when it's paid out would be what?

STUDENTS: Tax-free.

MR. WATSON: A thought here. Why would any employee let me buy a million-dollar life insurance policy on their life? If they're key, I'm paying them a lot of money, but also in exchange for letting me buy a key person policy to protect my business, I will do something extra for the key person. Something I am not going to do for the other employees. Employee Benefit plans, discussed next.