Using key man policies as a business partnership benefit

By Nina Kaufman, Esq.

Q.: We are setting up key man insurance policies, and one of the spouses asked whether the business could pay for the family’s term life insurance policy as a benefit from the business.  Can a partnership use a partner’s family term life insurance policy as a business expense, with the intention of using the policy as a way to buy out the spouse’s interest in the business?

 A.: Key man, or life insurance, policies can be an excellent way to protect your interest in the company in the event of the death of one of the partners.  Usually, a company will take out the policy on the life of its owners (the “key persons”) so that, upon death, the funds are available to pay the family for the deceased owner’s share of the business.

However, there are a number of options to consider.  There’s the nature of the key man insurance policy (term life, or permanent life?).  There’s the owner of the key man insurance policy (the business? Or a cross-purchase by partners?).  There’s the amount of the key man insurance policy (is it sufficient to pay the value of the partner’s share of the business?).  There are tax issues, depending on how the payment of premiums is arranged.  The business owners should speak with their insurance, accounting, and legal advisors to make sure that the key man insurance policy they choose best suits their needs.

Here are more law questions about small business insurance.