I—Reverse Key Person Insurance

Reverse key person insurance offers an alternative means of providing key employee insurance by having someone other than the business purchase insurance on the life of the key employee. It is particularly useful with C corporations, where the corporate alternative minimum tax can reduce the death benefit received by the corporation. With reverse key person insurance there is no exposure to the alternative minimum tax, because the death benefit is not paid to the corporation. If the key employee is also a stockholder, payment of the death benefit outside the corporation also avoids increasing the value of the deceased’s stock and thereby avoids any increase in estate taxes.

DURING LIFETIME.Such a program can be established by having the trustee of an irrevocable life insurance trust purchase insurance on the key employee. As both owner and beneficiary of the contract, the trustee pays the premiums directly to the insurance company.

Many guidelines are used in estimating the dollar value of a particular key employee. However, the value can be most easily estimated by using a factor of three to ten times the employee’s salary. Other guidelines that have been employed involve either a determination of the employee’s replacement cost, or an estimation of lost profits or credit.