Should you write key person insurance into a trust?
Businesses purchase keyman insurance as a policy to safeguard their ongoing financial success. If a key employee passes away or develops a serious illness, it provides the company with a lump payout. The key person makes no premium payments and receives no insurance benefits. The policy is fully set up to benefit the company and not any particular employee.
Key man insurance is typically not written into trust because the company is the one who pays the monthly insurance payment, and after a successful claim, the insurer will pay the company directly. There is no need in this instance for a trust to be in place. In fact, it could cause problems such as a delay in payment of benefits to the company
There are instances where a trust may be used. For example, partnership protection where there is no limited company. Writing partnership protection into a trust, such as a Partnership Protection Trust or Cross-Option Agreement, is a strategic measure employed by business partners to ensure business continuity and the seamless transition of ownership in the event of a partner’s death or critical illness. By funding the trust with life insurance policies, the surviving partner(s) gain access to immediate funds to buy out the deceased or incapacitated partner’s share, averting potential disputes and financial strain. Additionally, this approach can provide asset protection, assist with estate tax planning, and align with the partnership agreement, creating a comprehensive framework for preserving the business’s stability and the partners’ interests.
Relevant life insurance is the only other business protection policy that you would write into trust. Although its still owned by the company the beneficiaries are the life assured’s family.