Key Person Coverage: A Place to Start with Business Owners

Situation: In my work with business owners, I’ve often noticed financial advisors leading with buy-sell/business succession planning. Having a succession plan in place protects the owner’s family in the event of an untimely death, but for relatively new businesses or younger business owners such a conversation may fall on “deaf ears.” Even with more mature businesses and business owners the time involved with determining the form of buy-sell structure, getting multiple owners to agree, and visiting an attorney to draft the agreement may test the patients of the business owner as well as the financial advisor. Consequently, I usually suggest starting with key person coverage.

Why start with key person coverage?

First, it’s an easy concept for financial advisors to explain and for the business owners to grasp. Also, it’s easy to implement, not requiring detailed analysis or legal documentation. Most importantly, the coverage can serve as a placeholder – giving the client protection while taking the necessary time to determine and establish the appropriate buy-sell arrangement. Once the appropriate buy-sell arrangement is determined the coverage can be repurposed for other uses, including buy-sell, or maintained as key person coverage.

It’s this author’s opinion that key person coverage should normally be the first form of life insurance acquired by a business. Consequently, I’ve had numerous conversations with financial representatives and client’s tax and legal advisors regarding the following questions:
• Who should be the policy owner and beneficiary of a key person policy?
• How is a key person’s value (and thus the policy face amount) to the business determined?
• What are the primary tax considerations? Are premiums tax deductible?
Our helpful white paper addresses these, and other questions associated with key person life insurance.

Continue reading print friendly PDF here.