Key Man Insurance

I don't know if "Key Man Insurance" would be as good for your situation as a "Buy-Sell" agreement would be.....

Let's look at this situation. In the unfortunate event of your partner's death, all of his assets (including his business holdings) goes to his spouse.

So, essentially if your partner dies, you are now business partners with his wife. If she remarries, and then she dies, you are now business partners with her second husband, with whom you have no relationship at this point.

You and your partner, in the event of one another's death, would probably like to take over 100% ownership of the company. Also, your wives would probably NOT want to be part owner in a business that they may or may not know much about....they would probably rather have the cash value of a 50% ownership within the company.

So, you utilize Life Insurance in a Buy-Sell agreement. The business pays the premiums on your lives, which is a tax deduction, and upon death, the spouse essentially "sells" her stake in the company, which you "buy" with the death proceeds from a life insurance policy.

I know and appreciate the moderator of this board's effort to keep this site from becoming an advertising free-for-all. In light of that, I have some helpful material I could e-mail or snail mail you, that would aid you in this important decision.

It's free and no obligation.

My e-mail account is:

burks85@gmail.com

Hope that helps.

Well maybe I should elaborate a little more. What I mean to say is that the business would suffer greatly if either one of us were to die as a result of the void we would leave and that void could be filled by a careful hunt for a replacement but I'm thinking that key man insurance would help us to absorb that loss while we regroup.

Key Man insurance should be a very important part of your overall business planning. Both partners play an integral part of its success, therefore, if one partner would pass away the business could lose alot of revenue. By purchasing a Key Man Life insurance policy it would benefit the business should one partner pass away by providing the funds to hire the necessary talent to keep the business running. The business would pay the premiums and therfore it would be a tax deduction.

I agree with Andrew completely, and really we are not talking about a type of insurance...it is all life insurance...we are talking about concepts.

Key Man Insurance is a policy that is set up on the life of an employee. If the employee passes, then it allows the employer time to fill that position, but does not in any way effect the ownership of the business. Policy is owned by the company, company is beneficiary, premiums are paid by the company and the company can tax deduct the premiums. If the company tax deducts the premiums, then it is reported as income to the employee and they pay taxes on it. Typically, this is done as an equity building whole life policy, with a retirement incentive to the employee of offering them the case value if the live to retire from the company.

A "buy sell agreement" is an arrangment between business owners where the partners agree that if one partner was to pass away, then the life insurance buys out the stake in the business. The insurance is based on the value of the business and each partner owns and pays a premium on the other persons life, with the other persons estate as the beneficiary. This prevents a business owner from ending up with a business parter from the family that is unfavorable. You would still accomplish what you are wanting to accomplish, as the partner would be bought out and you would own a 100% share in the business. At that point, you would be free to either hire another employee or take on another business partner. You can also set these policies up as equity building policies to use as a retirement benefit.

If you have questions, email me at dhorsey@myclearview.com

David J Horsey Jr, CLTC
Clearview Insurance & Financial Services

I have a similar situation as noted above. We are a design consulting practice with two partners and are exploring key man insurance for the purposes of buying out each other’s estates in the event of death. My question has to do with the amount. The value in our company has a lot to do with the value of the two partners, so it is not like we can run out and replace the other in the event of a loss.

Given that, I am wondering if we should be considering insuring for a lesser amount than the current market valuation? Does that make sense? In past valuations for our business, 1/3 – 1/2 of the business value has been based on cash, and the other portions attributed to contracts on hand and the past several years performance.