New Jersey Life Insurance Policies and their purpose.

What Is Key Man Insurance or Key Employee Life Insurance?

Nearly every business has key employees who are critical to the overall success and profitability of the business. Key employee life insurance is insurance on the life of a key employee, purchased to help reimburse an employer for the economic loss caused by the death of the employee. As such, key employee life insurance is not a specific type of life insurance policy; rather, it is an effective way for a business entity to use life insurance.

Typical Key Man Employees

A key employee is anyone in whom the business is deemed to have an insurable interest, usually based upon a substantial impact on the financial success of a business. Smaller companies tend to have a greater need for key employee insurance since they do not have a pool of employees from which to select a replacement if a key employee dies. Further, the success of a smaller business can be directly attributed to the vital contributions of a few individuals. In general, a key employee can be anyone who—

is responsible for management decisions,
is highly paid,
has a significant impact on sales, or
has a special rapport with customers and creditors.

The Purpose of Key Man or Key Employee Life Insurance

The purpose of key employee insurance is to help protect a business from economic losses that can occur when a key employee dies.

Losses from a Key Employee’s Death

A business can typically suffer in four ways if a key employee dies:

1. The death may cause a loss of management skill and experience. This can be particularly devastating for companies without management depth.

2. There may be a disruption in sales or business production. When a key employee’s talents are vital to these areas, the business is certain to suffer. And if clients recognize the key employee as vital to the business operations, they may delay orders or refrain from doing business until they find out how the organization will respond to this loss.

3. The business may experience credit difficulties. A drop in business income may make it more difficult to make credit payments. In addition, creditors may hesitate to extend loans or favorable credit terms to a business that has lost a key employee, particularly if that employee’s talents or resources were factors that encouraged the creditor to extend loans or special terms in the past.

4. Losses also surface from expenses associated with hiring and training a replacement for the key employee. Even if the company can promote from within, business losses may continue to accrue until the replacement becomes thoroughly familiar with the job.

Advantages of Key Man or Key Employee Life Insurance

It is clear that there are serious financial consequences when a key employee dies. Here are the advantages businesses enjoy when key employee life insurance is in place:

The employer receives needed funds which can be used to help meet financial obligations and train a replacement if the key employee dies.

Death proceeds are exempt from the regular income tax, but may be subject to the corporate alternative minimum tax.

While the policy is in force and the employee is alive, the cash value of a permanent policy is available for use in a variety of ways.*

*Withdrawals and loans will affect policy values and death benefits and may have tax consequences.

Our Professional Resident Agent,  Dwain Ammons has been helping consumers with insurance decisions since 1986.
Call him at (888) 283-4749 for immediate help.

How Key Employee Insurance Works

Key employee life insurance is one of the simplest of the business life insurance programs to implement. The business applies for the policy on the life of a key employee. If the business is a corporation, the board of directors must adopt a resolution authorizing the purchase of the policy. The resolution should mention that the policy is being purchased to protect the corporation from loss it could suffer if the key employee died.

The employer applies for, owns and is the beneficiary of insurance on the key employee’s life.

If the employee dies, policy proceeds are paid to the employer to use as it wishes.

The business pays all of the premiums and is the policy owner and beneficiary. All incidents of ownership should belong to the business. If the insured has any of these incidents of ownership, the policy proceeds will be included in his or her estate for federal estate tax purposes.

More specifically, life insurance provides cash to your family after your death. This cash (the death benefit) replaces the income you would have provided and can meet many important financial needs: It can help pay the mortgage, run the household, send your kids to college, and ensure that your dependents are not burdened with debt. The proceeds from a life insurance policy could mean that your family won't have to sell assets to pay outstanding bills or taxes. What's more, there is no federal income tax on life insurance benefits (in most cases).

Distributions of Proceeds by the Company.

Although the proceeds of a key employee insurance policy are usually exempt from the federal income tax (but perhaps not the corporate alternative minimum tax), they lose their exempt character if distributed to some third party. The tax consequences may vary depending on what kind of distribution is made and to whom. For example, if the proceeds are later distributed by a corporation as dividends to its shareholders, the dividends will usually be taxable as ordinary income to the shareholders.

New Jersey Group Life Insurance and Conversion Options.

Many employers, including the State of New Jersey, offer life insurance under a group plan and sometimes pay part or all of the premium. A medical exam is usually not required for insurance purchased this way, and the insurance can be less expensive than coverage purchased as an individual.
Upon separation of service or employment the group life insurance policy may be converted to a permanent policy.  This converted policy will probably be much more expensive than the group insurance.  Policies offered in this manner are different from group insurance, and you should evaluate the materials shown to you in the same way as if you were considering a purchase of an individual policy through an agent.

Research Different Policy Types
  • Term Life Insurance Policies Overview.
    Term Life Insurance provides protection for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the term, which can be from one to 30 years. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for the lowest rates.
  • Permanent or Whole Life Insurance Policies Overview.
    Permanent or Whole Life Insurance provides lifelong protection. As long as you pay the premiums, the death benefit will be paid. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, this may be the wrong type of insurance for you. You can cancel or surrender the policy in total or in part and receive the cash value as a lump sum.
    " If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of protection covering you for your lifetime.
    " You usually can borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit. With all types of permanent policies, the cash value of a policy is different from the policy's face amount. The face amount is the money that will be paid at death or policy maturity. Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company's financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.
  • Different ways to fund Key Person Coverages.

    Funding Alternatives

    Key employee insurance, of course, utilizes a life insurance policy as a funding instrument. Some business owners may be tempted to consider funding alternatives. These alternatives, however, have their drawbacks as discussed following.

    A Regular Savings Fund
    A company can set aside funds on a periodic basis with the hope there will be enough money on hand if a key employee dies unexpectedly. The drawbacks to such a plan:
    current obligations may require the business to use the funds rather than set them aside
    the funds can be easily withdrawn to deal with a more immediate problem
    there is no guarantee the business will have enough time to develop a substantial fund before a key employee dies.

    Periodic Investments
    As funding to cover losses incurred as a result of the death of a key employee, making periodic investments has the same drawbacks as a regular savings fund. More than this, there is no guarantee the value of the investment fund will not fall at the very time the business has the greatest need for cash.

    Life Insurance—The Preferred Funding Instrument
    Life insurance is generally the preferred funding instrument to cover losses incurred as a result of the death of a key employee because—subject to the continued claims-paying ability of the insurer—it can guarantee a specific amount of money precisely when the money is most needed (assuming all premiums are paid when due and that there are no substantial loans or withdrawals). While term insurance may be used, cash value life insurance is usually preferred because it can provide additional benefits for the business.

    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.
Details and important additional information to know.
  • Sales Illustrations.
     It is likely that an agent will show you one or more life insurance sales illustrations. An illustration consists of a series of numbers indicating how the policy works. The illustration usually shows the guaranteed results under the Life Insurance policy for each year in the future, and the results if all the non-guaranteed items continue at their present level. This will probably not happen as actual results may be better or worse than the non-guaranteed amounts shown in the illustration (but not worse than those that are guaranteed)
  • Notice: This website may be considered as an advertisement, and may lead to pertinent policy recommendations to NJ individuals and NJ businesses . The resources listed here are available for residents of New Jersey, USA only.