The financial success of mid‐size businesses, which typically have relatively few employees, can depend on the unique talents and expertise of a single person or a few key people. “These ‘key employees’ are often the most difficult to attract, replace and/or retain,” says Ed Agnew, VP Sales Executive, Johnson Insurance. “If a key employee is lost to a competitor or unexpectedly passes away, the company may have trouble recruiting someone of the same caliber to replace that person.”
Generally, anyone who directly contributes to your company's bottom line or is fundamental to its operations is considered a key person. In some businesses, it's a salesperson who has developed strong and long‐standing relationships with important customers. It may be an employee who leads product development, or a C‐suite executive, such as a CEO, COO, CIO or CFO. Or, it may be an owner of the company.
If a key person unexpectedly passes away, the business's profitability—or even survival—may be called into question. Depending on the role the key employee played in the business, his or her loss may result in:
“In some cases, a key employee may be someone who plays multiple different roles within the company,” Agnew says. “The likelihood of finding one person with the skills to fill all those roles is slim, so the company may need to consider making multiple hires to compensate.”
Key person life insurance can be a useful tool to manage the risk of losing a key employee. “The premiums for key person life insurance are inexpensive compared to the policy benefits,” Agnew comments. “Depending on the age and health of the employee, a lot of leverage can be gained.”
If a key employee passes away, the death benefit is payable to the company tax‐free, as long as certain government regulations have been met, such as filing an annual tax form and having the employee sign a consent form. “There are no strings attached to the proceeds, so the company can use it for whatever business purpose is most important at the time,” Agnew says. “Death benefits are paid in a timely manner, exactly when they are needed most.”
Another advantage: Cash values accumulate tax‐deferred. They can often be accessed on a tax‐advantaged basis through policy withdrawals (up to the basis) and policy loans.
Key person life insurance is usually owned by the business, and the business is also the beneficiary of the policy. But it's also a versatile tool that can be set up in different ways for a variety of purposes. For example, sometimes it's used to:
When the success of your business hinges on the talent and expertise of a single person or a few key people, the need to mitigate your risk and exposure is critical. To learn more about how key person life insurance can help protect your business, contact your Johnson Insurance advisor.