Critical Illness Insurance

Small business owners can utilize company owned critical illness insurance to strengthen a key employee’s ties to the Company. Critical illness insurance typically covers the occurrence of cancer, heart attack and stroke. Optionally, additional illnesses can be covered. Critical illness insurance pays out a lump sum dollar amount if the insured contracts the covered illnesses and survives.

Typically the Company will take out a critical illness policy on its key employees to protect the Company should a key employee be lost to illness for an extended period of time. If the policy is to be used as an employee retention tool, the return of premium option will be selected. This option provides for the full return of all premiums paid should the covered employee not suffer a critical illness during the term of the policy (typically until age 65).

Here’s how it works. The Company and key employee set up a shared ownership agreement. The Company owns and pays for the basic benefit of the critical illness insurance policy. The employee owns and pays for the return of premium benefit. If the employee suffers a critical illness the Company will receive a tax free lump sum to cover the costs incurred due to the loss of the key employee or alternatively they could assist the key employee during recovery. If the key employee does not incur a critical illness prior to retirement (i.e. age 65), the key employee will receive a tax free benefit representing the sum of all the premiums paid by both the key employee and the Company. The key employee must stay with the Company until retirement to receive the sizeable benefit.

End result ... the Company gets key person insurance; the key employee has to stay with the Company to collect a sizeable tax free retirement benefit.

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