Key Man Life Insurance and Corporate Knowledge: A Lesson for All to Remember

Key Man Life Insurance and Corporate Knowledge: A Lesson for All to Remember What a corporation’s officers and shareholders know concerning the business of the corporation, the corporation knows.  This knowledge that is imputed to a corporation remains with the corporation throughout its life, and a recent case involving “key man life insurance” highlights this important lesson for all business owners that a corporation is not allowed to suffer from “amnesia” and to otherwise ignore information that its officers have been told or that is in the corporate files. Key man life insurance is an important tool for all small business owners, as it allows the company or the other shareholders to purchase the shares from a family of another shareholder who may have deceased.  The proceeds of that life insurance policy are used to purchase those shares, thereby allowing continuity of ownership but also providing some value for those shares to the decedent’s estate. In a recent case decided by the 7th Circuit, a corporation had purchased key man life insurance, insuring the life of the majority shareholder.  The beneficiary originally was the other shareholder, but that was then changed so that the beneficiary was the corporation itself.  There was evidence that the intent did not change, i.e., it was the intent to have the shares of the “key man” purchased with the proceeds of the life insurance. The key man eventually retired, and sold his shares to a new owner, who became the president of the corporation.  The insurance policy remained in place.  When the retired “key man” died, the insurance company paid the $1,000,000 of proceeds...

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