Advantages and Disadvantages of Key Employee Life Insurance

There are a number of advantages of key employee life insurance. Understanding them can help you make a much wiser financial decision. Here is a contained list of 4 advantages/disadvantages. These include:

1. The value of the business owners’ investment (and the ongoing credit of the business itself) is stabilized and maximized immediately by the existence of key employee life insurance coverage. During the insured’s lifetime, policy cash values are carried as a corporate asset and can easily, quickly, and inexpensively be made available to the corporation for a business emergency or opportunity. At death, the infusion of large amounts of cash will serve as a shock absorber to cushion the impact of the key employee’s loss.
2. From the time the first premium is paid, the business and its creditors have the assurance of instant capital at the death of a key employee. In this sense key employee coverage can serve both as a form of commercial loan protection as well as collateral for securing future commercial loans. Many banks and other lending institutions will refuse to make large loans to closely-held corporations unless life insurance in appropriate amounts can be obtained on pivotal personnel in the business.
3. A business receiving life insurance at the death of an employee is not restricted as to the manner in which that cash can be utilized. Key employee proceeds can be used for many purposes including finding a qualified replacement for the deceased key employee, paying for the training of the replacement, replacing lost profits, protecting the firm’s credit rating, providing benefits under one or more employee benefit plans, and financing a buy-out of one or more deceased or disabled business owners.
4. Key employee life insurance has some disadvantages. Instant, discounted capital provided by business-owned life insurance comes at a cost. Premiums must be paid with after-tax dollars. Also, the corporation must pay an opportunity cost: it cannot use money allocated to premiums for any other corporate purpose.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM