KEY PERSON PLANNING
What If You Lost a
Key Person Today?
Is there a key person in your business? A person whose absence would cause your business
to lose something valuable --- experience, knowledge, time, money? Maybe this person is
you ... your partner ... a valued employee. What can you do to protect yourself and your
business?
Key Person Planning
Since the financial loss could be severe enough to cripple or destroy your business, you
should have enough cash available to compensate for the loss. But how?
You might consider a cash fund. The company sets aside a certain dollar amount each month
to offset expenses and/or losses should a key person die.
But what happens if the key person dies within a year? Or more than one key person dies?
Or what if your company needs some cash now and withdraws from the fund to meet immediate
obligations? Will the money be there when you need it?
Another alternative is periodic investments --- in bonds or mutual funds. Again, you face
the same problems as with a cash fund.
Key Person Insurance
You insure against the risk of the loss of a building. You insure against the risk of the
loss of a vehicle. Why not insure your key people? Life insurance can guarantee a
cash payment upon the death of a key employee. Your company owns the policy. Your company
is the beneficiary. You determine how much you need by the employee's value to the
company.
If the insured dies, death proceeds are paid income tax-free to the company. Accumulated
cash values are carried as a current asset on the books and are available for the use of
your business.
How Do You Determine The Employee's Value?
Determining an employee's value to the business --- a dollar amount --- is difficult. But there are several commonly-used methods for placing a monetary value on a key person's worth to your business. Many times, the amount is determined by a multiple of salary. Commonly three times salary. As the key employee's value to the business rises, the multiple used can also increase. Another method determines the difference between the key employee's salary and the salary that would be paid to a replacement for the employee. Then multiply the excess by the number of years needed to find and train the replacement employee.
Key employee valuation is flexible. Your financial advisor can help you determine which method works best for you.
What If The Employee Quits Or Retires?
Some policies allow you to change the insured from the terminating employee to another key employee. Another option is to cash in the life insurance policy for its accumulated value*. Or your business can continue to hold the insurance until death --- and still collect tax-free death benefits. If your key employee retires, you may decide to "sell" the policy to the employee for its cash or replacement value.
Key person insurance
helps you and your business by providing funds---for hiring a replacement, training costs,
business expenses --- when a valuable employee dies.
Don't overlook one of your most valuable resources, human resources, when reviewing your
risk management program. Key person planning can help ease your business through a
difficult transition. For more information about this and other financial topics, contact
us.
*Subject to surrender charges. Unpaid loans and loan interest will be subtracted from the
accumulated value.
