Key Man Insurance

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Who do you think in your organization is that kind of an employee whose knowledge, work and overall contribution to your organization you consider to be outstandingly valuable? If you have 1 or a few names already, then these are your key men. What if your business is to suffer a financial loss due to the death or the inability of the key man t work for an extended period? Key man insurance helps compensate for such a loss.

Who can you consider as key man?


Key people in an organization can be those who:
  • Help drive your business and give it a direction

  • With their efforts help give your organization the ideal sales figures and the profits that you may otherwise have lost.

  • Are at levels like directors, owners, partners, senior managers, managers in technical development, operations managers and similar such individuals.

What are the insurance losses that may occur?


The losses that are predicted in key man insurance may be put into 4 distinct categories:
  1. A loss that may occur due to the inability of a key man to work for an extended period. This will provide temporary personnel to replace the keyman and also maybe finance recruitment as well as training of the replacement.

  2. Loss of profits that would otherwise have come from sales. Losses that would incur from delay or cancellation of any project involving the key man. Loss also means loss of specialized skills.

  3. Loss of partnership interest or shareholders interest. Protection of this loss ensures that existing shareholders or partners should purchase the shareholding or partnership interest.

  4. Loss arising from any fault by anyone involved in guaranteeing loans for business or banking facilities.

How much will key man insurance cost you?


When you are insuring your key man you should consider:
  • What effect the loss of the key man would have in the profit figures of your organization?

  • What would be the cost of recruiting as well as training a replacement of the key man?

  • What are the loans that could be recalled on the key man’s death or disability?

What are the key man insurance premiums based on?


When the insurance companies take to insure the key man in your organization, there are few factors that determine the premiums that they charge. The premiums are based on:
  • Salary: Multiples of the key person's salary (usually between 5 and 10 times) is taken into account. Although this gives a straightforward means to work out the premium, it may not reflect the true value of the individual to your business.

  • Profits: The proportion of profits i.e. the annual profits, the key person's salary and the time it would take to replace these are taken into account here.

  • Term: The time for which the key man insurance is to be taken.

  • Tax Position: There is no legislation regarding taxation of key man insurance. However, what is considered is that whether the premiums will qualify for tax relief. If there may be some amount of shareholding by the key person, then tax relief on the premium may be unlikely.

Why should you purchase key man insurance?


Here are 5 reasons why you should purchase key man insurance.
  • The business that you run is a professional one and the key employees are such that they cannot be replaced easily due to legal or ethical limits.

  • Your business would not be able to continue for long without that particular individual you have lost.


  • Continuity in business is important. If you have partners, see how much they understand your business. Take care to find out how your family understands your business. Someone may inherit your partner's share of the business and not know much about it. Food for thought.

  • Scope for suture growth and financing will be considered by insurers as an important factor. If there is scope for growth in the future, key man insurance may be purchased.


  • The age of the key persons is between 30 and 55 years. Disability may be more probable than death, hence key man insurance may be considered to keep a check on the losses that may occur because of the inability to work of that particular individual that might incur losses.


Running an organization successfully requires the cumulative effort of the employees and there are some employees who become indispensable. These key men of the organization need to be insured as they are the ones who help take your organization to a direction. Key man insurance is an important aspect when you want to insure your business to run in an organized manner.
 
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Jane
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PostPosted: Tue Apr 25, 2006 4:58 am   Post subject: employer-paid Keyman's insurance  

Sir,
I have a couple of questions in this regard. Should we consider the employer-paid Keyman's insurance premiums as deductible for the profits tax ? What about the policy proceeds ? Are they also taxable ?

regards,
Jane

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lakemen
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PostPosted: Tue Apr 25, 2006 7:55 am   Post subject: Proceeds are taxable  

Hi everyone !

Incase the policy has features like the ones described in my first posting, then I am sure the premiums would be deductible. The policy proceeds would act as a compensation to the employer as the loss of profits. Hence the proceeds are taxable as trading receipts of the employer.
regards.
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Jane
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PostPosted: Tue Apr 25, 2006 8:59 am   Post subject: are the premiums deductible ?  

hi...I'm back again with another question in this regard....suppose I consider the employer to be either a sole proprietor or in a partnership and the insured to be a sole proprietor or a partner, would then the employer's premiums paid with respect to the policy be deductible? Are the policy proceeds also taxable in that case ?

regards.

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fatman
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PostPosted: Wed Apr 26, 2006 5:28 am   Post subject: No Way !  

My friend, basically we need to understand one important thing....and thats solely the relationship between the organization and its sole proprietor or partner. We need to understand that the sole proprietor or a partner is not an employee to an organization. In case there had been any employer-employee relationship then only the Keyman Policy would have applicable over here. The premiums of this insurance are not deductible.
bye for now,
fatman
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Robbie
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PostPosted: Wed Apr 26, 2006 6:47 am   Post subject: are the employee paid premiums deductble ?  

Hey...I'm sure this is an important topic and probably everybody would have something to ask or say about it ! I would like to know if the policy premiums paid by a limited company employer be deductible (assuming that the insured is a director with a good value of shares in the company.) ?
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fatman
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PostPosted: Wed Apr 26, 2006 8:11 am   Post subject: Policy would protect the shares  

I think in this case neither the proceeds are taxable nor the premiums deductible. Incase the key employee be the sole proprietor or partner, the policy would be directed to protect the value of the shares since the life of a major employee is jeopardized.
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Ferguson
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PostPosted: Fri Apr 28, 2006 4:53 am   Post subject: It could be an endowment policy  

Should we consider the premiums paid by the employer on the Keyman's policy as deductible ? Incase its not a term policy but a life policy with a surrender value or an endowment policy what do we consider about the premiums ? Would the proceeds of such a policy be taxed ? Please explain.

Ferguson

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sasha
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PostPosted: Fri Apr 28, 2006 5:13 am   Post subject:   

hi....In this case the premiums are not deductible and are considered as a form of capital expenditure. The proceeds are also not taxable.
thanks.
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megc
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PostPosted: Tue May 22, 2007 1:31 am   Post subject: Keyman Insurance  

If a company buys this insurance for the employees benefit, and the employee recieves at retirement, would it be taxable or canthisbe rolled into an IRA to avoid taxes?
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InsTeacher
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PostPosted: Mon Aug 20, 2007 7:02 pm   Post subject:   

Tax issues on key person disability and life insurance:

The premiums are NOT tax deductible to the business, regardless of the entity formation (corp, partnership, sole prop, etc.)

The benefits received, if any, are NOT taxable to the business that owns the contract insuring the key person.

If this policy is assigned to the employee upon retirement as a retirement benefit, it would more than likely create a taxable event to the employee depending on the situation and the type of policy involved.

Key Person life insurance: the purpose is to indemnify the owners of the business for the death of the key employee, and it does nothing for the employee personally. It is to protect the business.

Key Person disability insurance: once again, the purpose of the coverage is to indemnify the business in the event the key employee becomes disabled. It normally has a lengthy waiting period after the occurrence of the disability and before the benefits will be paid to the business.

For further clarification, please post your concerns!

Hope this helps!

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lakemen
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PostPosted: Fri Dec 14, 2007 8:06 am   Post subject:   

Hi gaptrades, welcome to the forums. Your post on Keyman Insurance has been shifted to a new thread.

You can find it here >> http://www.ampminsure.org/feedback/about3591.html

Thanks,
Lakemen

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rjfjob
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PostPosted: Wed May 20, 2009 3:39 pm   Post subject: Thanks to all who posted  

So if I understand this correctly, Key person life insurance premiums for any business structure are not deductible and the proceeds (upon death of this key person) are not taxable. Thanks again to all.
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rhodora
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PostPosted: Sun Oct 11, 2009 12:35 pm   Post subject: sir  

sir,
i have a couple of questions i hope u can answer me.
1. Imagine that you owned a successful “one man business” explain why you might like that business to become limited company.
2. Before you enter college and before you study Land Reform, did you know its contents? If yes, can you tell names and cases of specific people you know who have successfully availed of this program? If no, what do you think you can do for a national program like this?
3. What do you think the reason/s why the law-making body decided to give higher rate than those employee/ worker who work at night than those who work at day time?

• Do minister/clergy (priest, imams et al) file income tax returns in the Philippines?

4. Does the fact that a firm is a monopolist, and therefore a price searcher, ensure that it will be able to earn positive economic profits? Why or why not?

hope u can help me answer my assignment. thank you!

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boyalla
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PostPosted: Sat Jan 23, 2010 1:18 pm   Post subject: Keyman insurance  

Suggest some keyman insurance policy
whether the employer can claim the benefits ? or the claims will be on individual account?

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