In a survey of small business owners that was conducted by the National Association of Insurance Commissioners (NAIC), approximately 35% of respondents stated that the success of their business was very dependent on one or two key people. Of those, however, only 22% said they had invested in key person insurance.
If you are interested in learning about this often-overlooked commercial insurance product, you can talk to an independent insurance agent. These local agents are available to answer any questions you may have about key person coverage and can help you obtain and review a selection of customized quotes.
There are more than 200 independent agents with offices in Maryland. Find an insurance agent near you to get started.
What Is Key Person Insurance?
Key person insurance is designed to indemnify your company for the loss of earnings it may sustain due to losing an important member of your team.
Different insurance companies may refer to this coverage by different names. Some of the names used include the following.
- Key person insurance
- Key employee insurance
- Life insurance for key employees
- Key person life insurance
- Key man life insurance
- Corporate owned life insurance (COLI)
No matter what you call it, a key person life insurance policy can compensate your business if certain key employees die or become severely disabled while working for your company.
Who Is Considered a Key Employee?
Although every person who works for your company has value, when it comes to key person insurance, you will only be insuring the few employees whose unique knowledge and rare skills play a significant role in your business’s success.
It is up to your business to determine which employees you consider key people. In most cases, these individuals include business owners, founders, and certain high-ranking workers.
Basically, if a certain employee’s sudden 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 Maryland?
The cost of key person insurance can vary. Your premiums will be influenced by factors such as:
- How much coverage you want to purchase
- Whether the policy you are purchasing includes coverage 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 person(s) you are insuring uses tobacco products
- The length of the term policy you are purchasing
When it comes to costs, key person life insurance is similar to personal life insurance in that the costs are commensurate with the likelihood that the insured person will die while the policy is active.
How Does Maryland Key Person Insurance Work?
Your company will identify the key person or persons it wants to cover and will pay the premiums for this coverage. As the holder of the policy, your company is the sole beneficiary if the insured person dies while the policy is in place.
The insured will need to carry their own personal life insurance policy if they want to have coverage for their family members.
Is Key Person Insurance Permanent?
Key person life insurance can be permanent coverage, but in most cases, businesses opt to purchase a term policy.
Term coverage is much less expensive than permanent coverage, and your businesses only needs to carry this insurance until the person whose life you are insuring retires or leaves your company.
The benefit of purchasing a permanent key person life insurance policy instead of a term policy is that permanent policies accrue a cash value and can be sold once the coverage is no longer needed.
What Does Key Person Insurance Cover?
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, your business can receive funds in the event of disability.
Your company will receive funds in the amount of the policy you have purchased. These can be used in any way that your company sees fit. Most businesses use the funds to cover lost profits and to pay recruiters to find a comparable replacement.
Are Proceeds for Key Person Insurance Taxable in Maryland?
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 companies that are set up as C corporations may have to figure these proceeds into the calculation of the alternative minimum tax (AMT.)
Alternatively, if your company carries a permanent key person life insurance policy and decides to cash it in, you will most likely need to pay taxes on the settlement amount.
You should contact a tax consultant to find out the tax implications of a key person insurance policy on your Maryland business.
Are Premiums for Key Person Insurance Tax Deductible?
Because the proceeds of a key person life insurance policy get paid out to businesses tax-free, the IRS does not permit you to deduct premiums paid for this coverage as a business expense.
How to Find the Best Key Person Insurance Coverage in Maryland
When you are shopping for life insurance for the key employees of your company, you can turn to a local independent insurance agent for help. These experienced 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.
Your agent can also provide you with more information about a number of other insurance products that may be beneficial for your business. Set up a one-on-one consultation with an insurance agent near you to learn more.
TrustedChoice.com Article | Reviewed by Jeffrey Green
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