2014 is upon us. You and your partner(s) have created and now run a successful business. You have business insurance, liability insurance, property and casualty, health, unemployment, and what must seem like a mountain of other policy coverage depending upon your specific industry requirements. What's often overlooked in many instances is key person insurance, also known as key man insurance.
Colin Aiken, Assistant VP of the Life & Benefits Division of Emery & Webb, Inc. best sums up the objective of key man insurance; "It is to provide funds to recruit, select and train a key employee's replacement, replace lost profits and continue the confidence of customers, creditors and employees." Simply put, it is life insurance to cover financial losses in case of the death or incapacity of an important or "key" member of the business. It typically is in place only during the tenure of a key individual, should their inability to work cause potential major financial losses or business interruption due to their absence or death.
Many members or partners bring a specific and often unique skill set to a business: one might be the rainmaker in the business, with substantial contacts and networks that feed the growth of the business; another with an extensive history or knowledge in a certain field, and another might be someone who handles a specific area of expertise or concentration of your business that would be hard to replace and therefore have an immediate or substantial impact to your bottom line should death or an accident occur.
Macabre as it might seem, it's essential to the stability and future planning of an organization with more than one partner, and is a business coverage and expense that you should not be without. Typically it's thought of as an economic bridge to tide over the company's potential loss of income until an individual can be replaced. The policy is always treated as an emergency coverage for lost earnings and is for specific amount of money rather than a revenue source. It is also usually paid for and owned by the business itself.
What's little known is that this type of insurance is often portable or convertible. The individual insured can take this life insurance policy with them if they should leave the organization. The policy, assuming it has been in place long enough to accrue value, can also be sold, which is a life settlement. Typically this is done by older individuals who are looking for an immediate cash settlement and their policies are considered a current asset. The prices paid for these policies can range from 10 to 75 percent of the death benefits.
Many of these policies, if in place for a longer period of time, are cheaper for an individual to request their company to release to them personally rather than going back into the insurance marketplace to acquire life insurance at an older age, which means a more expensive policy. Key person insurance can be also used as deferred executive compensation. Always check with your accountant when setting up these plans with your insurance agents as they are considered assets of your business and have tax ramifications both on the personal and business level.
So there actually is an insurance policy that can be used before you die-imagine that! But on that note: here's to your health and happiness in 2014. Happy New Year to all our clients, colleagues, and friends.