Friend is working for a small company as main person in charge of operations. The president is asking them to take out a key man life insurance policy on them. The benefit would pay out to the company. This person is not currently a shareholder and does not personally know all the owners.
Please share any considerations in helping them make a decision of whether to allow this.
The only possible downside I would see, assuming they are paying for it, is that the potential exists for it to be counted against you if you need a policy for the benefit of your family. In some cases, some insurers will only cover a certain multiple of your income at their best rates. If you need a new policy, they may count the existing coverage against you, and you would end up paying more.
That said, I'd be very comfortable saying to your boss, "Hey, I'll let you cover me, but I'd like you to also set aside a portion for my family as well. At a certain point, the premium increases for the extra will be nearly negligible for the company and yet beneficial to your family.
Also, as alluded to in the comments, insurers may incentivize the purchaser if you fall into lower risk groups. They may pressure you away from riskier habits (smoking, sky diving, etc.). You are under no financial obligation to adhere to these, but politically it may become compulsory. That said, if you want to become a pilot (higher premium) you may need to tell your employer first.
Oh, and if the conversation starts with, "Mr. Soprano," you may want to investigate one of those dead man services that emails your secrets if you don't check in every day. :)
The scandal regarding key man insurance a few years ago was that some companies were insuring large numbers of employees without their knowledge. Thus they received income when low level employee died. In fact it was possible for the company to get a bigger check than the family.
The fact they asked is a good sign. It shouldn't count against some insurable limit because they could get the policy without telling the employee. I see no reason to reject the idea of the policy.
In the United States most companies provide some Group Term Life Insurance policy for all full time employees as a part of the benefit package. The proceeds are paid to the employees family.
RC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in income, using the IRS Premium Table, and are subject to social security and Medicare taxes.
If the company doesn't offer this, the employee should ask the company to provide this. Some companies go beyond the $50,000 amount and automatically provide a policy equal to a years pay or 50,000 which ever is higher. Though the premium for the extra coverage is taxable.
The fact that the employee is the main person in charge of operations, means that a small company could be in trouble if they die. For the company the idea of insurance makes sense. For the employee the company is letting them know they are valuable. Now the company needs to insure they don't leave for another employer by providing excellent pay and benefits.
My advice is NO... unless the company makes you the Owner of the policy and pays the premium and they agree to only be the beneficiary of the policy. The reason is this... if they are the owner, you lose all your rights as the "Insured". The company I was employed with for 27 years ask to take out a key man life insurance policy on me (1 million dollars), I agreed. Two years later I was diagnosed with colon cancer at the age of 45. They terminated my employment was able to retain the life insurance policy on me because they are the owner. The owner of the policy has all control; I would say NO if I knew what I know now. Basically the employer has the right to rid themselves of the liability of your employment if you get to be a drain on their insurance but retain the asset. I hope this helps
