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 assetâyour top employees? If not, you should consider âkey-personâ 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, its key scientist or other essential employee helps develop new products, attract investors and generate profits. Those people could be your most important asset.
But what happens if a companyâs chief researcher or other key worker dies? The firm might fall into disarray and investor capital could dry up. By insuring its top employees with âkey-personâ insurance, however, the business may be more likely to survive the loss.
Key-person insurance (previously known as âkey-manâ) offers a financial safety net. It can provide the cash needed to hire a replacement and keep the business running. Thatâs 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 companyâs founder, its patent-generating scientist or anyone else critical to the business.
The policy may be term insurance or cash-value life insurance. The premiums paid by the company are not tax deductible. And while life insurance benefits are normally not 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.
Additional benefits
Besides helping to stabilize a companyâs financial position following an essential employeeâs 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 personâs death.
⢠Instill loyalty and enthusiasm in the insured employee.
⢠Provide funds needed to purchase a deceased ownerâs 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 help provide some answers.
