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How can my business use a Key Man policy?

There are several benefits a Key Man policy can provide. For instance, Gregory Johnson is a 45-year-old skilled architect who has been employed by Johnson and Sons Construction for 18 years. Gregory has played a significant role in building the business. Rick Reed is the owner and founder of Johnson and Sons Construction, and he understands how important it is to plan for the unexpected, especially when it affects the success of his business. Rick decides to purchase a Key Man life insurance policy in case Gregory dies unexpectedly. Gregory currently earns $100,000 annually and Rick has determined that it will take five times Gregory’s current income to replace him and recover any lost business costs in the event of Gregory’s unexpected death. After spending three years training his replacement, Gregory is ready to retire at age 65. Johnson and Sons Construction has a few options:

The business can surrender the policy and keep the accumulated cash value.
The business can surrender the policy, paying the accumulated cash value to Gregory, net of premiums paid in, as a retirement bonus.
The business can surrender the policy, paying the accumulated cash value to Gregory as a retirement bonus.
The business can transfer the policy to Gregory, if Gregory wants to continue paying premiums and keep the policy as a personal insurance policy.

*The purpose of this example is to illustrate a concept. Specific tax or legal questions should be directed to your tax or legal counsel.

How can my business use a Key Man policy?

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