Key-Person & Buy-Sell Insurance are very popular way to protect you and your business. When a co-owner dies, the surviving business owners usually have five options in dealing with the deceased owner’s business interest:
- Buy-out the heirs with Life Insurance proceeds: This is usually the most preferred option. After all, the surviving owners know how to run their business. It usually makes sense to buy-out the heirs and carry on business from there, especially in case where the heirs lack business expertise or interest in running the business.
- Keep the heirs in the business
- Take on an outsider who purchases the deceased’s business interest
- Sell to the heirs
- Liquidate the business or sell to a third party
Three Types of Key-Person Insurance:
- Key-Person Life Insurance
- Key-Person Critical Illness Insurance
- Key-Person Disability Income Protection
Key-Person Life Insurance.
Life insurance is usually the cornerstone of a key person protection strategy. It provides an instantaneous injection of capital into the business upon the death of the key person. Death benefits are received by the company tax-free.
Renewable Term Life Insurance is usually the most economical option over the short-term. However, there are situations in which a more permanent insurance solution should be considered, such as when protection is expected to extend over a longer time frame, or there is need to create a funded supplemental compensation structure for the insured individual.
Key-Person Disability Income Protection
Disability insurance can be used for two purposes in a key person context:
The insurance can provided salary continuation to a key person in the event they become disabled, usually until the earlier of age 65 or recover from the disability.
Owner-managers can purchase insurance that provides continued payment of office expense and salaries during the period of disability, usually for a limited time period.
Key-Person Critical Illness Insurance
Critical illness insurance provides protection in a situation where a key person is affected by a specified diseases or health problems that do not necessarily render them disabled but nevertheless affect their desire to work to the same extent as before.
This coverage will pay a lump sum, or in some cases a stream of income to the business, to help cover losses created by the absence or lower productivity of the individual.
Please contact us to see how we can be of help.