For small businesses in South Carolina, a key person is usually the business owner or founder, and the key person designation could also extend to one or two key employees. In larger corporations, certain executives, highly visible employees, and even top salespeople or those with unique skillsets could be designated as key persons.

In any case, if an owner or an irreplaceable member of the executive team unfortunately passes away, can the business protect itself from the potential financial impact of that loss? In most cases, the answer is yes, with an investment in key person life insurance in addition to other business insurance policies.

Independent insurance agents in South Carolina can help you decide whether you need key person insurance and explore your options.

What Is Key Person Insurance?

Key person insurance in South Carolina is a type of business life insurance that a small business or a corporation purchases on a key person’s life to protect against the sudden loss of that person and the negative impact it would have on the organization. In a key person life insurance policy, the company that purchases the policy pays the premiums and is the beneficiary if the key person dies.

The National Association of Insurance Commissioners reported that while 71% percent of small businesses in a survey said they were very dependent on one or two key people for their success, only 22% had key person life insurance in place. 

Benefits from a key person life insurance policy allow the company time to replace the person or implement strategies to continue in their absence.

The employee named in a key person life insurance policy has no rights to the benefits nor participates in the policy in any way. But the business must notify the person of the intent to purchase key person insurance, and must obtain the person’s written permission to purchase the policy.

Key person life insurance may be required by your lender if you are trying to obtain a business loan. It assures the bank that you could survive the death of a key person that your business depends on. This is especially important for small businesses with a single founder or a small group of co-founders.

What Does Key Person Insurance Cover in South Carolina?

If the key employee named in a key person life insurance policy dies, the company that purchased the policy will receive the benefits. The payout can be used to pay regular expenses while the company restructures or finds a replacement, pay off debts, pay investors, and pay employee salaries or severance.  

Who should be covered with key person insurance? Typically small businesses will consider key person insurance for anyone who is deemed to be irreplaceable. This may include owners, partners, founders, key salespeople, important managers, and so on, if the person’s loss could cause the business great financial harm or even cause the business to go bankrupt.

What Is Key Person Disability Insurance?

Key person disability insurance in South Carolina is similar to key person life insurance, but benefits are payable when the key person is suddenly disabled as opposed to in the event of the person’s death. If a key person suffers a permanent total disability, the damage to your business would likely be the same as if the person had died.

Key person disability insurance protects the business by paying a portion of the disabled employee’s earned income. It can help the business pay for office expenses, salaries, depreciation, and certain other expenses that continue despite the key person’s disability.

What Does Key Person Insurance Cost in South Carolina?

No two key person insurance policies will cost the same. But there are many factors that influence the cost of key person insurance in South Carolina, including the following:

• The employee’s individual characteristics: As with any life insurance policy, one of the most important predictors of cost is the insured person’s personal characteristics and risk factors. The key person’s age, medical history, occupation, family medical history, driving record, and history of risky behaviors (e.g., dangerous hobbies like skydiving) correlate to the person’s risk of death, and help determine the corresponding key person insurance premium.
• The type of policy: A key person insurance policy can be temporary (a term policy) or permanent. Term policies typically cost less because they offer coverage for a certain period of time (e.g., 10 years), and they do not accumulate cash value. Permanent key person life insurance, on the other hand, lasts for the full life of the insured person, accumulates cash value, and offers other benefits depending on the type of policy purchased.
• The policy’s death benefit: A policy with a $500,000 death benefit will naturally cost less than a policy with a $2,000,000 death benefit.

Key person insurance can be cost-prohibitive if the insured employee is elderly or unhealthy.

Is Key Person Insurance Permanent in South Carolina?

Key person life insurance can be structured like an individual life insurance policy, as a term policy or a permanent policy.

Term life insurance provides coverage for a specified period of time, such as 10 or 20 years. Term life insurance is always less expensive than permanent life insurance. Key person life insurance is most often in the form of term insurance, and is frequently structured to terminate upon a specific date or timeline, like the anticipated date of the employee’s retirement.

Permanent life insurance provides coverage for the insured person’s entire life. It also allows for a cash value component that grows over the life of the policy. In the case of key person insurance, the cash value is an asset that can be used as collateral for a loan. Permanent key person insurance policies can also be sold if the coverage is no longer needed.  

But despite the additional benefits offered by permanent key person life insurance, it is usually quite expensive. Most key person policies are term policies.

Are Key Person Life Insurance Premiums Deductible in South Carolina?

According to the Internal Revenue Service, premiums paid for a key person life insurance policy are not a deductible expense on a business's federal income taxes. But the proceeds of the policy paid to the business are usually tax-free.

If your company decides to sell a permanent key person life insurance policy, you may have to pay taxes on the proceeds of the sale, depending on the specifics of the transaction.

How a South Carolina Independent Insurance Agent Can Help

Key person life insurance can be an essential protection for many small businesses. It’s also complex and requires the help of an experienced insurance professional.

An independent insurance agent in your South Carolina community can help you learn more about key person insurance and how it can protect your company. Independent agents aren’t tied to a single insurance carrier, so they can work with multiple insurance companies and help you find the one that is best for your unique business.

Contact an independent insurance agent in your city today.