Would you hesitate to buy fire insurance for your lab or office building? Of course not. What about liability insurance in case someone slips on your steps? Same answer. But have you insured what could be your most valuable asset-your top employees? If not, you should consider key-person insurance.
Protecting Your Most Valuable Asset
The know-how, judgment, and experience that build a business are found in people-not equipment or machinery. The company president, a key salesperson, or other essential employee helps develop new products, attract new customers, and generate profits. Those people could be your most important asset.
But what happens if a company’s key worker dies? The firm might fall into disarray, and investor capital could dry up. By insuring its top employees with key-person insurance, however, the business may be more likely to survive the loss.
Key-person insurance (previously known as key-man) offers a financial safety net. It can provide the cash needed to hire a replacement and keep the business running. That’s why savvy firms looking to keep their businesses running smoothly can benefit from key-person policies.
How It Works
Key-person insurance can be structured in several ways. Typically, the business buys a life insurance policy on the life of the key person. The company is the owner, premium payer, and beneficiary of the policy. The covered person could be the company’s founder or anyone else critical to the business.
The policy may be term insurance or cash value life insurance. The premiums paid by the company aren’t tax deductible. And while life insurance benefits normally aren’t subject to income tax, the death benefit received by a corporation from a key-person policy may be subject to the alternative minimum tax. Key-person insurance can also be set up to fund buyout arrangements or deferred compensation plans for a retired top employee.
Besides helping to stabilize a company’s financial position following an essential employee’s death, key-person insurance can:
- Serve as collateral for bank loans.
- Pay off company debt or hold off creditors seeking to collect following the key person’death.
- Instill loyalty and enthusiasm in the insured employee.
- Provide funds needed to purchase a deceased owner’s stock.
Ask yourself how much it will cost to replace a key employee in the event of death and where the cash will come from. Check with a reputable insurance professional to find out how key- person insurance can provide some answers. IBI