KEY EMPLOYEE INSURANCE
A study conducted in 1990 by Dun & Bradstreet
indicated 47% of all business
failures are attributable to a lack of management and finances.
The death of a key
employee can cause serious problems for the business. To help
protect against this loss,
the business can acquire a life insurance policy on the life of
the key man or key woman.
The business entity owns the policy and pays the premiums. The
premiums are not
deductible and the death proceeds are received income tax free*.
Proper amounts of key
employee insurance are core considerations in any risk management
program.
The life insurance proceeds received by the company can be
used for a variety of
purposes, including:
1. Recruit and train a new employee to replace the deceased.
Determine the costs of
replacing a key executive. What are the up front recruiting and
incentive costs associated
with bringing on a new key employee? Additionally, the training
costs are expensive in
both financial and time measurements.
2. Help replace lost profits that would have been earned had
the key employee not died.
What percentage of profits is attributable to the key
employee.
3. Provide funds to continue the employee's salary to his or
her family for a period of
time, or to purchase the business interest owned by the
decedent.
4. Pay a tax-deductible employee death benefit to the
deceased's family or estate.
Generally up to $5,000 can be received income tax free by the
deceased employee's estate
or beneficiaries.
5. Strengthen the company's working capital and balance sheet,
which may help reassure
other employees, creditors and investors about the continuity of
the business.
Many guidelines can be used to determine the dollar value of a
key employee. A multiple
of the person's compensation, estimating profits lost, or the
replacement method are
examples. Sound planning should examine all the methods to
determine the appropriate
amount of insurance coverage to insure the key employee.
*Companies subject to the corporate alternative minimum tax
provisions may be subject
to minimum tax on policy earnings and death benefits in excess of
the company's investment
in the policy.
