After conducting a survey of small businesses in the US, the National Association of Insurance Commissioners (NAIC) reported that although 71% stated that the success of their business was very dependent on one or two key people, only 22% had invested in key person insurance.
If you are interested in learning more about how this often-overlooked business insurance product can benefit your company in South Carolina, you can talk to a local independent insurance agent. These agents can answer your insurance-related questions and can help you obtain and review customized quotes. Find an insurance agent near you to get started.
What Is a Key Employee?
Of course, every person who works for your company has value, but some people are much harder to replace. When it comes to key person insurance, you will only be insuring the few 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. For most companies purchasing a policy, these individuals include business owners, founders, certain high-ranking workers, and those with rare and specialized skillsets.
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 on them.
What Is Key Person Insurance?
Key person insurance can be called a few different things, depending on the insurance company you are working with. These include the following.
- Key employee insurance
- Key person life insurance
- Key man life insurance
- Corporate owned life insurance (COLI)
Key person insurance policies are designed to indemnify your business for the loss of earnings sustained if an insured key employee dies or becomes disabled while employed by your company.
How Much Does Key Person Insurance Cost in South Carolina?
The cost for key person insurance can vary from one policy to the next because premiums can be influenced by several different factors. These include things like the following.
- The amount of coverage you are purchasing.
- Whether you are buying key person life insurance, key person disability insurance, or both.
- The occupation and industry of the person(s) you are insuring.
- Details about the insured including age, sex, health history, and tobacco use.
- Whether you are purchasing a term or whole life policy. If it is a term policy, the length of your term will also play a factor in how much the policy costs.
Basically, key person life insurance is similar to personal life insurance in that the costs are proportionate to the risks.
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Is South Carolina Key Person Insurance Permanent Coverage?
Key person life insurance can be permanent coverage.
When you purchase a policy, you can choose to either buy a term life or a whole (permanent) life policy.
|Term life||This covers only give a given amount of time, such as 10 or 15 years.|
|Pros||This is far less expensive than whole life.|
|Cons||These policies expire at the end of their term and hold no cash value.|
|Whole life||This coverage lasts for as long as you continue to pay the premiums.|
|Pros||These policies accrue value and can be cashed in at any time.|
|Cons||These policies are far more expensive than term life.|
Most businesses opt to purchase term life insurance for their key employees. This is because it is much less expensive than permanent coverage, and because businesses typically only need this coverage until the key employee retires.
What Does Key Person Insurance Cover?
Key person insurance is designed to provide compensation to the company that is named as the beneficiary on the policy if an insured key employee passes away while the policy is in effect.
Policies that include a key person disability rider can also receive compensation if the key employee becomes incapacitated and can no longer work.
Your company can use the funds it collects in any way it sees fit. Most use the money to cover lost profits, recruit replacement talent using an employment agency and incentives like a hiring bonus, or buy out the key person’s heirs if ownership rights are involved.
What Does Key Person Insurance Not Cover?
There are cases where your key person insurance claim may be denied. This typically happens if a key employee passes away during the first two years of your holding the policy.
Most life insurance companies write in a contractual clause during the first two years of your policy. This is known as the “contestability period.” If a key employee dies during this contestability period, your insurance company will open an investigation prior to releasing funds to your business.
Your claim is likely to be denied if the insured committed suicide or if the investigation turns up irregularities such as intentional omissions on your application, fraud, or other acts of dishonesty.
After the policy has been in place for two years, suicide is typically covered by key person life insurance.
Is Key Person Insurance Taxable in South Carolina?
Premiums paid on key person life insurance policies are not tax deductible.
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, and your company receives a payout as the beneficiary, this income is usually not taxable. However, if you are set up as a C corporation, you may have to figure this income into the calculation of the alternative minimum tax (AMT).
For the employees being insured, key employee coverage does not count toward their gross income and should not affect their taxes in any way.
You should contact a tax consultant to learn more about the tax implications of a key person insurance policy on your South Carolina business.
How to Find the Best Key Person Insurance Coverage in South Carolina
When you are looking for the best life insurance policy to cover the key employees of your company, you can talk to a local independent insurance agent. These agents can help you compare policies and quotes from some of the area’s top insurers so you can be sure you are getting the coverage you need at a reasonable price.
There are more than 300 independent agents in South Carolina so it should be easy to find an insurance agent near you.
TrustedChoice.com Article | Reviewed by Jeffrey Green
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