If you own a business, chances are you think about the company and your staff on a daily basis. Do you have an employee who if they didn’t show up for work tomorrow, or ever again, would directly affect your business? Who is the difference maker in your company? How do you identify them? These people are the ones who if they were suddenly gone would impact the company whether it’s regarding:
- Operations (Perhaps they are the ones who make the work flow.)
- Customer Relations (They know everybody and everybody knows them. They don’t need a PDA to keep track because it’s all stored in their head.)
- Profitability (They have a direct and substantial impact to your bottom line.)
This individual is a business’s “key person.” Insurance owned by the business on the owner or on another key person’s life is an important part of a business plan. Many times this person’s deep relationships is what drives business through the door. If this person were to die unexpectedly, problems for the company may arise such as:
- Loss of skill and experience
- Disruption of revenue stream
- Loss of reputation and recruiting power
- Management and staff disruption
- Contractual benefits due to employee contracts
The costs associated with losing a key person can be tangible as well as intangible.
Your organization could lose profits generated by the special talents or contacts of the key employee. Finding a replacement to step in is usually a slow and expensive process. Many companies have no other employee with the same knowledge, experience, judgment, or reputation as the deceased or disabled key person. Less qualified employees must fill in and their lack of experience could impact your bottom line.
Filling the position from inside means that the understudy’s duties must continue to be performed, and the vacated position must also be filled. Additionally, there is a learning curve when training a new person and the company must absorb the cost of getting this person up to speed. Hiring from the outside may be even more time consuming and costly.
Oftentimes an employer is contractually obligated to pay salary and/or provide benefits to the family, even if the employee cannot perform their work due to death. This also causes your bottom line to take a hit.
How Key Person Insurance Works
Key person insurance policies provide cash to meet outstanding obligations and maintain business continuity. This is especially important if the key person was instrumental in securing credit or capital. Key person protection helps a business through the difficult times reassuring other valued employees, clients, vendors, and prospects that the company’s future is secure.
At the death of the key person, your business (the policy beneficiary) will file a claim with the insurance company to receive the death benefit. The company will pay the benefit income tax-free to the business.
The income tax-free death benefit can then be used to:
- Replace lost earnings
- Maintain business credit
- Provide a financial cushion
- Offset lost business value
- Recruit and hire a qualified replacement
- Make survivor income payments to the key person’s family
A death can occur at any time. You can’t count on cash flow to for sure be there when needed, like for the unexpected death of a key employee. Buying key person life insurance means you have financial assets available when it’s needed. It’s recommended that the life insurance cover 5-10 times the key person’s income. One reason to buy term life insurance is to use it as key person life insurance. Quotacy can help you get the coverage you need. Take 30 seconds to run a term life insurance quote to see how little it would cost to ensure your business would stay afloat during difficult times.
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Buy-Sell Agreements and Life Insurance: Protecting Your Business
I found out a company still has a million dollar life insurance policy on me and I was fired 6 years ago – how can I report this – I am no longer a key person to this business and the business has been sold –
I am sorry to hear that there is still a life insurance policy on your life owned by a new company that you never worked for. It is surprising that they continue to pay the premiums every year. At the time the company purchased life insurance policy on you there was an insurable interest, which is a fancy way of saying that there would be a loss to the company if you died while employed there. That makes this a legitimate life insurance need.
Approximately 10 years ago some new federal laws were put in place that make companies report the life insurance policies they own on their taxes every year. So the IRS should know that they own a policy on you. There also is no requirement of the company to drop the coverage after your termination whether voluntary or involuntary. If you die while they still own a policy, then a death benefit will pay out to the new company. Since you no longer work there, the death benefit will be taxable (not income tax free as it is for your family) to the company.
Therefore, there isn’t anyone to report this to as it doesn’t sound like the company is doing anything wrong in the eyes of the law. That being said, I can’t see any reason why they would continue owning this policy, and it definitely doesn’t feel ethical. Wish I could give you a different answer to your query.