The National Association of Insurance Commissioners conducted a survey of small businesses and found that although more than two-thirds stated the success of their business was very dependent on one or two key people, only 22% had invested in key person insurance.
If you want to learn more about this often-overlooked commercial insurance product, you can talk to a local independent insurance agent. Your agent can answer any questions you may have about key person coverage and can help you obtain and review a selection of customized quotes. Find an insurance agent near you to get started.
What Is Key Person Insurance?
Key person insurance goes by a few different names including the following.
- Key employee insurance
- Life insurance for key employees
- Key person life insurance
- Key man life insurance (yes, this antiquated term is still used!)
- Corporate owned life insurance (COLI)
Regardless of what you call it, key person life insurance policies are designed to compensate your business if certain key employees die or become disabled while working for your company. This can indemnify your company for the loss of earnings sustained due to losing an important member of your team.
Which Employees Are Considered Key Employees?
Naturally, every person who works for your company has value, but when it comes to key person insurance, you will only be insuring employees whose unique knowledge and skills play a significant role in your business’s success.
It is up to your business to determine which employees you consider key persons. Most of the time, these individuals include business owners, founders, and certain high-ranking workers.
Basically, if a certain employee’s absence would result in major financial losses to your company, you may want to consider purchasing key person life insurance for them.
How Much Does Key Person Insurance Cost in Alabama?
The cost for key person insurance can vary from one policy to the next. Premiums can be influenced by factors such as the following.
- How much coverage you are purchasing.
- Whether the policy you are purchasing insures against extreme disability as well as death.
- The occupation and industry of the person(s) you are insuring.
- The age and health history of the person(s) you are insuring.
- Whether the insured person(s) uses tobacco products.
- The term of the policy you are purchasing (how many years of coverage).
Basically, key person life insurance is similar to personal life insurance in that the costs are commensurate with the risk that the insured person will die while the policy is in place. Local independent agents can help you compare rates.
How Does Alabama Key Person Insurance Work?
The company that purchases key person policies will pay the premiums for this coverage and is the sole beneficiary of the policy. If the insured employee dies or becomes severely disabled, the company receives benefits.
What Does Key Person Insurance Cover in Alabama?
Key person insurance covers the business if the named insured dies while the policy is in place. If your policy includes a rider for serious disabilities that render the insured unable to work, this too will be covered.
Your company can receive funds in the amount of the policy you have purchased. These can be used to cover lost profits and the cost of bringing on board a comparable replacement.
Is Key Person Insurance Permanent?
Key person life insurance can be permanent coverage, but most businesses opt to purchase term insurance. This is because it is much less expensive than permanent coverage, and businesses typically only need this coverage until the key employee retires.
The benefit of purchasing a permanent key person life insurance policy is that these policies accrue a cash value and can be sold for this value once the policy is no longer needed.
Is Key Person Insurance Taxable in Alabama?
The employees who are being insured will have no tax implications at all.
Companies that purchase key person life insurance must do so with after-tax dollars. Money spent on these policies is not tax deductible. Additionally, if your company purchases a permanent policy and cashes it out, you will most likely need to pay taxes on the settlement amount.
If an insured employee dies, the company that serves as the beneficiary may or may not have to pay taxes on the funds received from the insurance company. In most cases, these benefits are not taxable, but C corporations may have to figure them into the calculation of the alternative minimum tax (AMT.)
You should contact a tax consultant to find out the tax implications of a key person insurance policy on your Alabama business.
How to Find the Best Key Person Insurance Coverage in Alabama
When you are shopping for life insurance for the key employees of your company, you can talk to a local independent insurance agent for help. These agents can help you compare policies and quotes from a few competing insurers so you can be sure you are getting the coverage you need at a reasonable price.
There are more than 330 independent agents in Alabama so it should be easy to find an insurance agent near you.
TrustedChoice.com Article | Reviewed by Jeffrey Green
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