Protecting a Businesss Most Valuable Employees
Key employees are central to any business. Without them, the business might never achieve its long-term aims and objectives. However, businesses that might otherwise be very cautious about risk management may overlook protecting their key executives. The result: In the event of an unexpected death, a business may struggle to replace that individuals contribution.
A key employee can be anyonean owner or non-owner. What distinguishes someone as key is that his or her loss would severely impact a business until a replacement could be found and trained. Who might a key employee be?
- Someone who might influence client relationships;
- Someone whose loss might affect a companys credit or reduce business income; and/or
- Someone with special skills or talents.
Life insurance is often used to protect businesses against the loss of such a person. In the event of an unexpected death, the life insurance death benefit can help sustain a business until a replacement can be located, hired and trained.
Things to Consider
Key person life insurance helps a business to maintain operations in the event a key person dies prematurely. The numbers in the accompanying sidebar illustrate the impact the loss of a key person can have on the business.
While nothing can replace a long-time, valued employee, a key person program can lessen strains on business operations. Such a program also can help fund a business continuation program if the key person is an owner.
Cash values of a key person life insurance policy grow tax-deferred and can be used by the business as a balance sheet asset. Post-retirement, the policy can remain as a business asset, but other options are discussed below.
Although the life insurance premiums are not deductible, the death proceeds can be received income tax-free, offering considerable benefits to the company. If the business is a C Corporation, the alternative minimum tax may apply. However, planning and adjusting the death benefit can, if feasible, address that tax concern.