An existing personally owned policy may be used. However, if the policy is purchased by a business in which the insured is not a partner, shareholder or officer, the transfer-for-value rule may apply.
At the insured's death, the proceeds from the key person policy provide the business with cash to meet a number of objectives:
- To replace lost profits.
- To buy a deceased principal's business interest under the terms of a buy-sell agreement.
- To prevent the possible loss of control to outsiders.
- To recruit, hire and train a replacement, including compensation for any mistakes he or she may make, and covering any unexpected expenses.
- To assure customers and creditors of the stability of the business.
- To provide retirement benefits under a corporate deferred compensation plan.
If permanent life insurance is used, the policy also creates a growing, tax-favored cash reserve that the business can use for whatever purpose it wishes during the insured's lifetime.
If a covered employee leaves the business:
- The policy can be kept in force.
- The policy can be surrendered, or sold to the former employee for cash.
- A new employee can become the insured under a business exchange rider. (Note: The IRS has ruled that a policy exchange privilege is not tax-free under IRC Section 1035.)
Back to Top | Next
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.
