Would your business substantially suffer if one of your most valued employees was unable to work? Key Person Insurance solves that problem.

Whether your business employs 5 people or 500 people, you will likely have an employee (or multiple) that is vital to the success of the business. What happens if that key employee were to pass away or become unable to work due to disability? Key Person Insurance is designed to help businesses manage the financial fallout accompanying the loss of this integral employee (& their contributions to the company). Insurance proceeds could be used for any of the following actions (among others):

1. Recruiting, hiring and training a replacement
2. Offsetting the income loss resulting from decreased sales or production
3. Paying off debts
4. Marketing campaigns to ensure your clients/customers know the business will be in good hands

As shown above, the potential uses for the insurance proceeds are diverse and it is ultimately up to the business owner on how to best overcome the challenges of not having that key employee on the job.

Two types of Key Person Insurance:

1. Key Person Life Insurance
2. Key Person Disability Insurance

Key Person Life Insurance is fairly self-explanatory: if the key employee passes away, the business receives the insurance proceeds tax-free.

For Key Person Disability Insurance, there will be criteria that must be met to satisfy a claim, such as the employee not being able to complete any duties of the occupation and is under the care of a physician. Also, they must be disabled for at least 60 days, which is called the waiting period and is customizable when applying for the insurance. The business would then receive a monthly benefit based on what amount was applied for; commonly, this will span between $2,500/month and $15,000/month. The insurance proceeds would be paid until the benefit period runs out or the employee returns to work.

Taxation of Key Person Insurance

Proceeds of the insurance are received by the corporation on a tax-free basis. Premiums paid are not tax-deductible.

For more information on Key Person Insurance or to set this up for your business, please contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.

DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.