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Details & Insurability

Usually, the key person will have no interest in the key person policy; however, since insurance is being purchased on his or her life, the key person may participate, usually by adding a term rider (if the policy is permanent, i.e. cash value, coverage) to increase the face amount of the policy. These benefits should be controlled by the key person; the biggest problem is structuring the plan to avoid "incidents of ownership" in the underlying contract. Otherwise, the entire proceeds might be included in the key person's estate at death, with the policy proceeds going to the employer. Finally, where the key person is a shareholder of the corporation, great care must be taken because the key person has an interest in the policy and there will likely be tax effects.

As with any life insurance, there are primarily two legal considerations at stake in the purchase of such coverage; the first being whether the employer has the ability (the insurable interest) to insure the key employee, and the second being the tax ramifications to the employer and the key person. Generally, an insurable interest is deemed to exist where a person, or a legal entity, would suffer an economic detriment from the death of another person, or, conversely, to accrue an economic advantage from his or her continued life (note that the bare existence of an employer-employee relationship does not give the employer an insurable interest). Where the employee's services contribute to the business's prosperity, there is no question of insurable interest. [back] [next]