Key employee life insurance is an important piece of employee benefits that can protect you and your key employees. Understanding when to utilize key employee life insurance will help you make a wiser financial decision.
- When the profits or the financial soundness of a client’s business would be threatened or when a client’s business will have a difficult period of adjustment following the death of a key employee such as a leading salesperson or an employee instrumental in the development of new products.
- When the success of a business is dependent upon the unique skills and abilities of one or more key employees and the business’ creditors insist that its indebtedness must be collateralized through the purchase of key employee life insurance.
- When a business desires to fund one or more obligations of the business at the death of a group of key employees (for example, the funding of large health and retirement benefits).
- When business owners have been required by creditors to co-sign or guarantee that if the corporation defaults, they will personally be responsible for paying off the debt. Key employee insurance will protect those individuals and their estates.
- Publicly held businesses quite often use key employee coverage to assure shareholders that the price of stock will not plummet nor will dividends fall with the death of a president or other senior executive.
- Where the nature of the business involves the rendition of personal services (e.g., legal, medical, or other licensed professionals), the death of a key person can cause a drop in business income.
- Where the psychological impact of the unexpected death of a key employee may be accompanied by disproportionately large costs involved in meeting the time table for work-in-progress, pending negotiations, and incomplete projects. There are almost always significant costs of searching for, finding, and hiring a successor. Key employee coverage can reimburse the business for these costs.
- Although it is rare that the death of a key person creates a void which cannot competently be filled given enough time, there are cases (especially in closely held businesses) in which key individuals are the business. At the death (or long term disability) of such a driving force, the business will often fail entirely. Key employee coverage can protect the financial interests of investors.
- Key employee coverage is particularly indicated in a closely-held business where profits are often dependent on the ability, initiative, judgment, or “rainmaking” ability of a single individual or small group of persons.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM