Momentum - Business to Business Online Magazine April 2017 | Page 28

How Key Person Life
Insurance can Protect the
Operations of Your Business
By Jan Laman, Harbour Insurance Services
If something were to happen to one of your key
employees, what would happen to your business?
Whether a key person leaves to work for someone
else, is somehow unable to work or dies, the
tumultuous impact on your business could be
devastating.
While you cannot prevent these events, there are
some key things you can do to be as prepared
as possible. One such option might involve the
purchase of Key Person Life Insurance.
Key Person Life Insurance is a policy that covers
one or more of your key employees with the
principal goal of protecting the value and on-going
operations of your business.
It is often looked upon as the very foundation of
a well-structured succession plan. The function
of providing a death benefit, and oftentimes, the
potential to accumulate meaningful cash value
you can access for an emergency, a Key Person Life
Insurance policy can help make sure your business
will survive...maybe even thrive in trying times.
Well-crafted policies such as these can also
help dissuade a key employee from leaving your
company in the first place. How? The policy can
be structured to act as a separate, non-qualified
incentive plan providing even more value to the
employer/employee relationship beyond other
traditional benefits you may already provide.
So how do you go about identifying which key
people in your business may merit such special
treatment? It comes do wn to the economics of
your business and which employee(s) departure
would have an adverse effect on such. Consider
serious impacts such as a decline in profits, loss
of credit rating or even the extraordinary cost of
hiring a replacement with skills equal to or better
than that key employee.
The structure of these policy types is
straightforward but, needs to be understood by
all. The policy is first purchased by your business
on the life of any key employee. The business is the
premium payor, owner and beneficiary. As such,
the business can use the cash any way you see fit
and can use the death benefit proceeds in any way
as well.
There are several tax implications that must be
correctly accounted for when establishing such a
policy program and each is unique to each business.
Be sure your life insurance agent works closely with
your accountant to ensure the best structure is built
for your specific situation.
Only you can determine the amount of coverage you
think would best represent the dollar value of any
key employee. The policy must work within certain
financial parameters but, most often can be built
precisely as desired.
So finally, what happens if the key employee leaves,
dies or retires?
If the employee leaves, you can use the cash in the
policy to fund the financial impact of that departure
or, simply keep the policy as before and show the
future death benefit as an asset for your business.
If the employee dies, you can do anything you want
with the death benefit proceeds.
If the employee retires, you can surrender the policy
to receive the cash value and give all, some or none
to the employee. You could also give the policy to
your key employee as a bonus. All of these scenarios
providing either a policy or cash to the employee
would be counted as taxable income to the employee.
It is important to note, being that this is first and
foremost life insurance, not everyone can qualify.
There are health and financial underwriting processes
that would be used to determine eligibility.
Providing a Key Person Life Insurance policy is a great
first step in ensuring your company can weather the
storm of employee volatility. Placing one on your
number one key person (you), makes sure your
succession plan can be built from a solid base. Truly,
there are very few businesses that would not benefit
from a properly structured policy such as this.