Keyperson Insurance

Q. My two partners and I are all in our mid thirties and we have a computer consulting corporation where we are equal shareholders. We have ten employees and we service medium and large size corporations. I am the technical expert, Mark is the project leader and administrative coordinator, and Kim is our marketing specialist. The loss of any one of us would be a major setback for the business. We generate $3 million in business revenue annually and have about $400,000 in equipment and other business property. While we hold some cash on our books, the loss of any one of us would result in a 25 per cent decline in business revenue and that would have a serious impact on the viability of our company. What can we do to protect the business in the event of the premature loss of any one of us? – Carlos H.

The significant loss of business income could have serious implications for the viability of your business and replacing a member of the team would be time consuming and costly both financially and emotionally. The best solution would be corporate-owned key person coverage. Here’s how it works. One low cost option is for your company to purchase term life insurance policies on the three key individuals. The cost is approximately $100 a month for one million dollars of coverage. Another option is to buy a multi-life universal life policy on the three key persons. While a more costly approach, there is more flexibility. For example, for $500,000 coverage on each individual, the annual cost would be approximately $4,500 to $4,800. The company owns the policies and pays the premiums because it can use the small business preferred tax rate on approximately the first $400,000 of business income. In this way, the insured individuals are not paying the premiums with after-tax dollars. By choosing universal life, there is flexibility to add more key people to the policy, to increase or decrease the coverage at a later date, increase premiums to create a tax deferred cash value, or make other changes as the business needs change or evolve.

With key person insurance in place, you and your partners have ensured that in the event of the loss of a team member, the company will have the financial means to stay afloat as well as search and pay for a new partner.

Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod,Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. When discussing Life Insurance Products, ScotiaMcLeod Investment Executives are acting as Life Underwriters representing ScotiaMcLeod Financial Services (Ontario) Inc. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia