Some employees are so vital to the success of a business that should they suddenly leave the company because they were severely disabled or died unexpectedly, the company could be virtually ruined overnight.
How can you protect all the time, effort and costly financing you’ve invested in your business if you were to lose such a valuable employee?
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Take for example a biotechnology start up company whose sole success depends on the unique skills of a researcher or programmer. Their unique abilities have the potential to make your company potentially very successful overnight once the product or service hits the market, but this key person dies or becomes disabled in a car crash coming to the office. You, your investors, and your business could be literally ruined financially within no time at all.
What is Key Man Life Insurance?
This type of insurance goes by a number of different monikers such as ‘Key Employee Coverage’, ‘Key Executive Coverage’, and ‘Key Person Coverage’. Key Man life insurance can be composed of 2 different types of coverage.
The first form of Key Man Insurance covers the employee for death benefits. This coverage would be through a Life Insurance policy which can be either ‘Term Life Insurance’ (employee is covered for so many years or term), or through ‘Permanent Life Insurance’ (employee is covered for life for death benefits and policy has a cash value).
Term Life Insurance policies are considerably less expensive than Whole Life insurance policy.
The second type of coverage includes disability coverage which pays out disability benefits. Disability coverage is often overlooked in favor of buying only a life insurance policy to cover key personnel.
However, you should really include disability insurance as part of your key personnel coverage because there are many ways your vital employees or partners could become ill or unable to work due to a disability. There are vast array of reasons a disability could occur ranging from diseases to accidental injuries. Many employers opt for a combination of both life insurance and disability insurance for key employees as the combined package affords a more comprehensive coverage.
Why you need key Man Insurance
Since key Man Insurance is purchased by the company, the company becomes the beneficiary. When a business has this insurance coverage, the business can be kept running and both creditors and customers will be more assured about the continuity of the business.
Additionally, the heirs of the deceased won’t become entangled with tax obligations that relate to the business. Also, you can use the death benefits to buy out the shares of the business from the estate.
This form of coverage also reduces the financial impact of reorganizing, and finding and training a replacement. Finally, and more importantly, any death benefits paid to the company are typically not taxable. Furthermore, since most businesses use term life insurance to cover their key person needs, which is typically very affordable, it’s a no brainer for a lot of companies once they assess the risk-reward of owning a policy.
Which Key Employees should be Covered?
The most vital question you should ask yourself when considering the need for Key Man Insurance coverage is to ask just how much the loss of a particular employee or other employees will impact your business. Here are some suggestions for you to consider this point.
1. Affects the Continuity of the Business – Especially important in business relationships involving 2 partners. If one of the partners dies, will the beneficiary be inheriting the business? If so, are they capable of taking the partner’s place or do they even have the skill set, background to do so? Will you be able to afford to buy them out? This sort of key person insurance is typically referred to as buy-sell insurance.
2. Business Collapse – Even more importantly, will your business even be able to survive without your partner? Is this person the cornerstone of why your business exists in the first place?
3. Irreplaceable – Although any partner or employee my be replaced, the primary question to ask is whether the replacement will have the training and years of valuable experience to fill in the gap? How long will it take for you to train and get them working at a functioning level?
4. Future Financing – For a variety of reason, you may require additional financing for your business. This means you may have to get a business loan. Many lenders will not even consider your application if you don’t have Key Man insurance coverage in place.
5. Age of Employees – Many new tech firms employ talented young people who tend to lean towards physical risk taking. They are more likely to be disabled and are less likely to have prepared for the possibility of dying.*Huntley Wealth Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.