The Key Man Agreement serves as a critical risk management tool for Canadian businesses where certain individuals are instrumental to the company's success. This document becomes relevant when a business identifies employees whose sudden departure (due to death, disability, or other circumstances) would cause significant financial strain or operational disruption. The agreement typically details the procurement and maintenance of life insurance policies, specifies how proceeds will be used, and outlines obligations of all parties. It must comply with Canadian federal laws including the Income Tax Act and provincial insurance regulations. Key Man Agreements are particularly important for businesses with specialized leadership, unique technical expertise, or significant client relationships concentrated in specific individuals. The document helps ensure business continuity and provides financial protection by establishing clear procedures for managing the impact of losing key personnel.
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1. Parties: Identification of the Company and the Key Person
2. Background: Context of the agreement, explaining the Key Person's importance to the business and the purpose of the agreement
3. Definitions: Key terms used throughout the agreement including 'Key Person Event', 'Insurance Policy', 'Benefit Amount'
4. Insurance Policy Details: Specifications of the life insurance policy, including policy amount, premium payments, and ownership
5. Company Obligations: Company's responsibilities including premium payments, maintaining the policy, and notification requirements
6. Key Person Obligations: Key Person's duties including health examinations, cooperation with insurance requirements, and disclosure obligations
7. Trigger Events: Events that activate the agreement such as death, disability, or critical illness
8. Payment and Distribution: How and when insurance proceeds will be distributed
9. Termination: Circumstances under which the agreement terminates
10. General Provisions: Standard clauses including governing law, notices, amendments, and severability
1. Non-Compete Provisions: Used when the agreement includes restrictions on the Key Person's future employment or business activities
2. Confidentiality: Added when specific confidentiality obligations need to be outlined beyond standard employment agreements
3. Split Dollar Provisions: Included when the insurance benefits are to be shared between the company and the Key Person's beneficiaries
4. Disability Coverage: Added when the agreement includes provisions for temporary or permanent disability
5. Cross-Purchase Options: Used in cases where other shareholders have the option to purchase shares upon a trigger event
6. Tax Treatment: Detailed section on tax implications when specific tax planning is part of the arrangement
1. Insurance Policy Details: Copy or summary of the insurance policy terms and conditions
2. Beneficiary Designation: Formal designation of beneficiaries and their respective shares
3. Premium Payment Schedule: Schedule of premium payments including amounts and due dates
4. Valuation Method: If applicable, the method for calculating company/share value
5. Consent Forms: Required insurance and medical information release forms
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