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Friend is working for a small company as main person in charge of operations. The president is asking them to take out a key man life insurance policy on them. The benefit would pay out to the company. This person is not currently a shareholder and does not personally know all the owners.

Please share any considerations in helping them make a decision of whether to allow this.

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    Would the company be paying for the policy? – John Bensin Aug 25 '13 at 18:01
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    John Bensin Yes employer pays. Keyman is normally for C or Director level employees the idea is if you get hit by a bus the company has cash to tide it over. And why do they have any say in it? Its protecting the shareholders of the company and if they want to take out key man insurance what does the employee have to do with that. BTW my last boss when he got director level was asked to sell his motorbike. – Neuromancer Aug 25 '13 at 18:24
  • Does the company have any friends in the mob? – Affable Geek Aug 25 '13 at 18:30
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    @Neuromancer Right, I know the reasoning behind it (our PhD's that testify have LI policies), and I assumed the company would pay, but the question asked if there are any considerations for the situation, and one major consideration would be if the company wasn't going to pay. That would be shady. – John Bensin Aug 25 '13 at 18:59
  • @Neuromancer Side note: Use @ and a user's name to notify them. That way they'll actually get a notification when you reply to them. – John Bensin Aug 25 '13 at 19:09
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The only possible downside I would see, assuming they are paying for it, is that the potential exists for it to be counted against you if you need a policy for the benefit of your family. In some cases, some insurers will only cover a certain multiple of your income at their best rates. If you need a new policy, they may count the existing coverage against you, and you would end up paying more.

That said, I'd be very comfortable saying to your boss, "Hey, I'll let you cover me, but I'd like you to also set aside a portion for my family as well. At a certain point, the premium increases for the extra will be nearly negligible for the company and yet beneficial to your family.

Also, as alluded to in the comments, insurers may incentivize the purchaser if you fall into lower risk groups. They may pressure you away from riskier habits (smoking, sky diving, etc.). You are under no financial obligation to adhere to these, but politically it may become compulsory. That said, if you want to become a pilot (higher premium) you may need to tell your employer first.

Oh, and if the conversation starts with, "Mr. Soprano," you may want to investigate one of those dead man services that emails your secrets if you don't check in every day. :)

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The scandal regarding key man insurance a few years ago was that some companies were insuring large numbers of employees without their knowledge. Thus they received income when low level employee died. In fact it was possible for the company to get a bigger check than the family.

The fact they asked is a good sign. It shouldn't count against some insurable limit because they could get the policy without telling the employee. I see no reason to reject the idea of the policy.

In the United States most companies provide some Group Term Life Insurance policy for all full time employees as a part of the benefit package. The proceeds are paid to the employees family.

RC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.

If the company doesn't offer this, the employee should ask the company to provide this. Some companies go beyond the $50,000 amount and automatically provide a policy equal to a years pay or 50,000 which ever is higher. Though the premium for the extra coverage is taxable.

The fact that the employee is the main person in charge of operations, means that a small company could be in trouble if they die. For the company the idea of insurance makes sense. For the employee the company is letting them know they are valuable. Now the company needs to insure they don't leave for another employer by providing excellent pay and benefits.

  • Thank you for the response, although this seems to apply to large companies (group policies) and benefit accruing to the employee – William Entriken Aug 27 '13 at 14:06
  • I worked for a small company with about 30 full time employees, we had a group life policy. They contracted for a basket of benefits. – mhoran_psprep Aug 27 '13 at 14:17
  • That was a group policy for the benefit of the company?! – William Entriken Aug 30 '13 at 1:49
  • No the group policy pays 50,000 to the employees survivors. Trade a free group policy that will benefit your family for the right to let them buy a key man policy to benefit the company. The IRS lets employers purchase 50K of coverage to benefit the employees family. – mhoran_psprep Aug 30 '13 at 5:21
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My advice is NO... unless the company makes you the Owner of the policy and pays the premium and they agree to only be the beneficiary of the policy. The reason is this... if they are the owner, you lose all your rights as the "Insured". The company I was employed with for 27 years ask to take out a key man life insurance policy on me (1 million dollars), I agreed. Two years later I was diagnosed with colon cancer at the age of 45. They terminated my employment was able to retain the life insurance policy on me because they are the owner. The owner of the policy has all control; I would say NO if I knew what I know now. Basically the employer has the right to rid themselves of the liability of your employment if you get to be a drain on their insurance but retain the asset. I hope this helps

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    Very good point. Perhaps the OP can create some agreement which states that if his employment with the company ends, he has the right to either assume responsibility of the policy, designate new beneficiaries and continue to pay premiums himself, or terminate the policy. – EkoostikMartin Feb 25 '15 at 18:52
  • Simple, valid contract: CO desires to procure a life insurance policy (“The Policy”) on The Employee and The Employee desires to choose an additional beneficiary of same policy. As such The Employee agrees to allow CO to procure The Policy with benefit to CO of AMOUNT and to a beneficiary of The Employee’s choosing for OTHERAMOUNT. CO agrees not to transfer its benefit in this policy except with written permission from The Employee. CO agrees that it will terminate this policy at the date The Employee is no longer employed with CO or at a sooner date as determined by CO. – William Entriken Feb 25 '15 at 20:46

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