Would you hesitate to buy fire insurance for your lab or office building? Of course not. What about liability insurance in case someone slips on your steps? Same answer. But have you insured what could be your most valuable asset—your top employees? If not, you should consider “key-person” insurance.
Protecting your most valuable asset
The know-how, judgment and experience that build a business are found in people, not equipment or machinery: The company president, its key scientist or an essential employee who helps develop new products, attract investors and generate profits. Those people could be your most important asset.
But what happens if a company’s chief researcher or other key worker dies? The firm might fall into disarray and investor capital could dry up. By insuring its top employees with “key-person” insurance, however, the business may be more likely to survive the loss.
Key-person insurance (previously known as “key-man”) offers a financial safety net. It can provide the cash needed to hire a replacement and keep the business running. That’s why savvy firms looking to keep their businesses running smoothly can benefit from key-person policies.
How it works
Key-person insurance can be structured in several ways. Typically, the business buys a life insurance policy on the life of the key-person. The company is the owner, premium payer and beneficiary of the policy. The covered person could be the company’s founder, its patent-generating scientist or anyone else critical to the business.
The policy may be term insurance or cash-value life insurance. The premiums paid by the company are not tax deductible. And while life insurance benefits are normally not subject to income tax, the death benefit received by a corporation from a key-person policy may be subject to the alternative minimum tax. Key-person insurance can also be set up to fund buyout arrangements or deferred compensation plans for a retired top employee.
Additional benefits
Besides helping to stabilize a company’s financial position following an essential employee’s death, key-person insurance can:
• Serve as collateral for bank loans.
• Pay off company debt or hold off creditors seeking to collect following the key person’s death.
• Instill loyalty and enthusiasm in the insured employee.
• Provide funds when needed to purchase a deceased owner’s stock.
Ask yourself how much it will cost to replace a key employee in the event of death, and where the cash will come from. Check with a reputable insurance professional to find out how key-person insurance can help provide some answers.
Kevin O. Stinnett, LUTCF is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor, 465 E. High St. Suite 101, Lexington, KY 40057, (859) 277-8370, offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients.
*The content of this material was provided to you by Lincoln Financial Securities Corporation for its representatives and their clients. This article may be picked up by other publications under financial professional’s bylines.
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