Other Uses of Key Employee Insurance

The major value of key employee insurance is, of course, when the key employee dies. But when a cash-value life insurance policy is used, both the employer and employee can benefit in additional ways.

For the Employer

The increasing cash and loan values of the policy can provide the business with a source of funds which are available regardless of the general credit conditions in the economy. While there are good reasons not to disturb the cash value of the policy, the funds are there if and when they are needed, and the business can borrow at the rate specified in the policy; however, the policy values and the death benefit will be reduced by outstanding loans and interest. There may also be tax consequences.

Another use of key employee insurance is in the credit area. A key employee life insurance can be used to help show that the business is on sound financial footing. Creditors may be more apt to extend credit if the business has protected itself against losses that might occur at a key employee's death. Further, the policy can serve as collateral for a loan.

If the key employee is also an owner, the key employee policy can also be used to help fund a buy-out of the deceased's business interest or a partial redemption under Section 303. The business (or the surviving owners, depending on how the business and the buy-sell agreement are arranged) can use the policy proceeds to purchase all or a portion (Section 303) of the deceased key employee's share of the business.

For the Employee

Key employee life insurance can also be used to help provide funds for a deferred compensation agreement. If the employee dies before retirement, proceeds can be used to pay any income due the key employee's family. And if the key employee lives to retirement, policy cash values can be used to help provide supplemental retirement income.

Keying in on Key Employees

Key employee life insurance is one of those rare sales concepts that is both compelling and simple. A policy written on the life of a key employee can benefit the business, the employee, and even the employee's family. Look for key employees in both small and midsize businesses, and be prepared to illustrate this exciting way to put life insurance to work for the business.

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