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Do you need key person insurance? Other important questions to ask yourself: What’s more important to my practice—its tangible assets, such as buildings and equipment or my top people who help make it successful? Do I have partners, managers, or staff who make critical contributions to my practice’s bottom line? Is there at least one individual in my company that I couldn’t imagine running my practice without? What would happen to my practice should any of these key people (including me) die or become disabled? If a key employee should die or become disabled, would my practice have to hire and train a replacement? Would my practice suffer productivity and revenue losses?

You’ve worked hard to build your practice to the success that it is today. You’ve made a lot of sacrifices over the years, personally, professionally, and financially. If you’re like many practice owners, one or more of your “key” employees are major contributors to your company’s ongoing success.

In many practices, key employees are those individuals who drive sales and bring in the greatest number of clients, have unique management skills and/or talent, or have vast industry experience. Aside from you, they are the lifeblood of your practice.

What is key person insurance?

Key person insurance is basically life or disability income insurance that is specifically structured to cover a key employee in a practice. Small or large, most practices have several key employees, including the owner or partners and one or two employees who are top performers and crucial to the successful day-to-day operations of the practice. Key person insurance provides the practice with a source of funds when needed most: at the death or disability of a key employee.

How key person insurance works. While the primary purpose of life insurance is the death benefit protection, it is important to understand the advantages that cash value accumulation can provide. Whole life insurance policies contain an important savings element known as cash value. The cash value depends upon the type of product, the face amount, the time in force, and length and amount of premium payments.

Upon the retirement of the key employee, the practice may take money from the policy’s cash value to fund supplemental retirement income for the key employee; transfer the policy to the executive through a bonus; or retain the policy as a practice asset.

Upon the death or disability of the key employee, the insurer will pay the death or disability benefit to the employer as the named beneficiary. The death or disability benefit can be used to help meet the practice’s financial needs in the event of the loss of the key employee and/or provide a benefit for the key employee’s surviving family members.

How to start a Key Person Plan. The business owner notifies and obtains the written consent of the key employee in order to purchase insurance on the employee. Once the policy has been approved, the practice pays the initial premium to the insurance company and continues to make premium payments. The practice owner may set up an agreement with the employee to share some of the death benefit with the key employee’s beneficiaries.

Take Note

The practice is the owner of the policy, which means for life insurance that the business has full access to the policy’s cash value for any purpose; the cash value of the policy appears as an asset on the practice’s balance sheet.

Key Person Insurance is flexible

Key person insurance can be structured with many flexible options. As a practice owner, you may find this solution attractive for many reasons:

  • It’s simple. Life and disability insurance policies provide an easy way to create funds should anything happen to your key employee.
  • It’s cost effective. Since your practice owns the life insurance policy, its cash value is carried on your practice’s books as an asset.
  • It’s flexible. At the retirement of your key employee, you may choose to give the policy to your employee. Your practice may even give the policy to some employees, but not others.
  • It creates confidence. Banks, creditors, and valued partners can be assured that your practice will continue uninterrupted in the event of the insured’s death or disability.

Learn how much protection your practice would need

When it comes to the amount of key person insurance you’ll need, there’s no “one-size-fits-all” solution, because your protection needs are as unique as your practice. A financial professional can help you develop a strategy that helps to meet the needs of your company.


The advantages of key person insurance are many. For example, key person insurance:

  • Can provide your business with a source of funds exactly when needed—when a key employee dies or becomes disabled.
  • Can help your business pay off loans, hire a replacement, and meet financial obligations in the wake of a key executive’s death or disability. This can help you keep your business running smoothly, despite the loss you’ve sustained.
  • Is an asset of your business. And if your key person insurance is in the form of permanent life insurance, your policy’s cash value can provide a source of funds for collateral business uses—such as funding employee benefits obligations and redeeming the business interest of a deceased owner.
  • Helps to assure banks, creditors, and valued partners that your business will continue uninterrupted in the event of the insured’s absence, whether due to death or disability.

Tax Considerations

When it comes to key person insurance, there are some important tax considerations to keep in mind. Life and disability income insurance premiums are not deductible for your business. There are no tax consequences to the employee unless some benefit is paid to the employee or the employee’s estate. Insurance proceeds are generally received income tax-free by the business. In pass-through entities, such as S corporations, LLCs and partnerships, the death proceeds increase the basis of the owner’s business interest. Premium payments, policy cash values, and policy dividends may also impact an owner’s basis.

Key Takeaways

Proceeds from Key Person insurance can be used to:

  • Hire and train new personnel
  • Meet debt obligations
  • Smooth out cash flow irregularities
  • Help compensate for revenue lost due to a key person’s death

Other Benefits of Key Person Insurance:

  • Allows the policy’s cash value to be carried as a company asset
  • Offers the flexibility to give the policy to a key person upon retirement
  • Creates confidence among banks, creditors, and partners that, despite a key person’s death, the company will operate uninterrupted

All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. # 2021-125676 Exp. 08/23

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