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Key Person Indemnification
Its purpose is to indemnify a business for the loss of earnings caused by the death of a key employee. In many business concerns, there is one person who possess technical knowledge, experience, or business connections that make him or her the most valuable asset of the organization to ensure its successful operation. An employee with the ability to develop and motivate a superior sales organization may also be a key person. A non-profit making organization that depends partly on charitable giving may consider a highly successful fund raiser as a key person. Insurance is purchased on the life of the key employee by the business and is made payable to the business as beneficiary.
Anything that stabilizes a business’ financial position improves its credit rating. Insuring the lives of key personnel not only assures banks and other prospective lenders that the business will have a financial cushion if a key person dies but also improves the firm’s liquidity through the accumulation of cash values that are available at all times. Hence, the firm can command more credit on better terms.
In accordance with the rule of law, the death of a partner dissolves the partnership, and the surviving partners become liquidating trustees, charged with the responsibility of paying over the deceased’s fair share of the business’ liquidated value to his or her estate. Even if the surviving partners can raise the cash to purchase the deceased’s interest, they have to prove that the price paid is fair. Closely held corporations are so similar in basic characteristics to partnerships that they have been described as “incorporated partnerships.” Although the death of a shareholder does not legally dissolve the corporation, the same practical difficulties may be encountered in any attempt to continue the business. These difficulties can be avoided by a binding buy-sell agreement financed by life insurance. Similar agreements can be arranged between a sole proprietor and one or more key employees.
Employee Benefit Plans
Employee benefit plans provide 3 broad types of benefits that can be financed through insurance:
Death and total permanent disability benefits
The plans that provide such benefits are usually referred to as group insurance.
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