The devastating death of a key person in your small business could result in the almost immediate shutdown of your business. Key person life insurance protects your business from potential financial crisis, and promotes an environment of stability and confidence to employees, clients and customers.
Utilizing key person life insurance to protect your business from potential financial crisis.
Identifying key persons involves being keenly aware of the value of both the specific and the intangible talents they bring to your business.
A key person in your business isn’t just you or a partner. Your key person may have earned this value through such intangible traits as inspiration or reputation, or by possessing a specific, hard to replace skill set. Two questions to consider in identifying key employees are:
- Business continuity or survival: Does this individual have significant effect on the profitability of your company due to technical expertise, experience in the field or an industry wide vision or market image?
- Replacing the person: Would the permanent absence or death of this person, no matter their salary or title, affect the smooth running of your company or halt or delay a new project due to difficulty or impossibility of replacing?
Would sudden, permanent absence literally sink the company?
Often this key person is the owner or one of the owners, especially if their loss affects the short or long term viability of the business. Key person life insurance will typically be required on business owners seeking a SBA loan or other type financing.
A key person could be that salesperson who generates excitement, thinks outside the box, energizes other employees and brings in a sizable percent of the income. If this person were suddenly absent, and before another “rainmaker” is found, the business could experience devastating financial loss.
The loss of a scientist, artist or the software engineer who developed your company’s intellectual property could cripple a business for many years.
What is key person life insurance?
The amount of key person life insurance, or key man insurance, should not be more than the business can afford without financially hurting other areas of the business. Key man insurance is taken out by a business as the owner of the policy that covers a person or persons, the insured, within the business. The business pays the premiums to the insurance carrier, and if the key employee dies, the proceeds are paid out to the life insurance beneficiary, which is the business.
How is the amount determined?
Here is one example:
The key person contributes 10% to the company’s annual net profits of $1,000,000, or $100,000. Multiply that by 5 years net profit percentage. A $500,000 key man life insurance policy would be appropriate in this case.
Other issues to be considered before buying key person life insurance.
Deciding on this type insurance involves many more details and should be discussed and considered as part of your overall business plan. Tax implications, without the proper review and possible adjustments, could cause unexpected budget issues. Among things to be considered include:
- Underwriting requirements
- Type of life insurance to choose
- Permanent: Whole or Universal?
- Disability income insurance choices
- Specific types of coverage: features, benefits
- Premiums tax deductible?
- Proceeds taxable?
- IRS reporting requirements
- Shopping for carriers
Responsible business owners.
The death of an employee is a devastating experience. As business owners, it’s our responsibility to protect and nurture our employees, the customers and clients our businesses serve, and the many lives and families affected by the stability and success of our individual businesses.
What’s the bottom line?
We establish and maintain a personal and business relationship with our clients. We know that Your BUSINESS Is Your Life, and Your LIFE Is Your Business, and we take both seriously.
Schedule an appointment now. We’ll talk about your business.
Contact Melanie Radcliff CPA, Inc, at firstname.lastname@example.org
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