Business Protection / Key Person
Protecting the business from the financial impact losing a key employee, and the expense of replacing them, is often a business owner's highest benefit planning priority.
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One of the first things a business owner needs to consider is how to protect their business against events that can pose an immediate threat to the security of the business and as a consequence, their family.
Life Insurance The worst case scenario a small business faces is the death of an owner. Often small business owners have loans or lines of credit they have personally secured. If there is not a plan to transfer ownership of the business, is there sufficient reserves and cash flow to carry things until arrangements can be made? If the family had to liquidate the business quickly, without a proprietor or partner providing management continuity, it is likely they would have to sell at a significant discount. Individual life insurance can protect your family by providing funds to cover debts, generate interim cash flow for the business to protect the value until future plans can be implemented, and to replace income to the family for living expenses. |
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Disability Insurance
Disability insurance replaces income in the event you are unable to work. For their personal disability insurance, depending on the type of business and tax situation, the business can help small business owners purchase their policies. The business owner may either pay for the policies with after tax dollars, in which case the disability benefits would typically be tax free, or the business could pay the premiums and take a deduction, in which case the disability income benefits would become taxable income when received by the insured.*
Another type of disability benefit is Business Overhead Expense coverage. Under a BOE policy, the business is reimbursed for its overhead expenses for a period of time if the owner becomes totally disabled. BOE coverage can help keep a business operating and people employed while a transition plan is being implemented.
* Note: This information is general in nature and is not intended to provide legal or tax advice. Always consult with your legal and tax advisors.
Key Person Insurance
The sudden loss of a key employee can be disruptive and costly to your business. All businesses have people that contribute directly to the company’s success through their ideas, specialized knowledge, experience and leadership. Key people can be those that:
When a business loses a key person:
Business earnings can be reduced – the death of a key person can disrupt the normal business process, and while searching for a replacement the business may lose money from lack of sales, business insufficiencies or lost opportunities.
Finding a replacement may be costly – often businesses do not have anyone qualified and ready to take over for the lost employee and must go outside the company for find and attract the right person. This process takes time to find the right person, and money to attract him or her.
Customers can shop around – customers who have known and relied on the lost employee may have doubts about the business being able to continue their service level. These concerns may translate into reduced sales and revenue as customers look to other suppliers or delay new transactions until they are confident the business will continue uninterrupted.
Employees become concerned – the death of a key employee can cause other employees to become concerned about the future of the company and their jobs. Your best employees could look for other employment to hedge their bets.
Financing could become strained – creditors could become concerned about the safety of the company’s credit worthiness due to potential disruption in the business, which could cause them to withhold new credit or request acceleration of outstanding loan payments.
Life insurance on your key people, payable to the business, provides the money needed to cover the direct costs of replacing the lost employee, and the indirect costs associated with internal disruptions and lost revenues.
Disability insurance replaces income in the event you are unable to work. For their personal disability insurance, depending on the type of business and tax situation, the business can help small business owners purchase their policies. The business owner may either pay for the policies with after tax dollars, in which case the disability benefits would typically be tax free, or the business could pay the premiums and take a deduction, in which case the disability income benefits would become taxable income when received by the insured.*
Another type of disability benefit is Business Overhead Expense coverage. Under a BOE policy, the business is reimbursed for its overhead expenses for a period of time if the owner becomes totally disabled. BOE coverage can help keep a business operating and people employed while a transition plan is being implemented.
* Note: This information is general in nature and is not intended to provide legal or tax advice. Always consult with your legal and tax advisors.
Key Person Insurance
The sudden loss of a key employee can be disruptive and costly to your business. All businesses have people that contribute directly to the company’s success through their ideas, specialized knowledge, experience and leadership. Key people can be those that:
- Have important managerial or operational knowledge or responsibilities
- Are responsible for manufacturing
- Have specialized product development knowledge
- Are responsible for client/customer relations
- Bring in a high percentage of sales
- Provide any hard to replace special skills unique to the business
When a business loses a key person:
Business earnings can be reduced – the death of a key person can disrupt the normal business process, and while searching for a replacement the business may lose money from lack of sales, business insufficiencies or lost opportunities.
Finding a replacement may be costly – often businesses do not have anyone qualified and ready to take over for the lost employee and must go outside the company for find and attract the right person. This process takes time to find the right person, and money to attract him or her.
Customers can shop around – customers who have known and relied on the lost employee may have doubts about the business being able to continue their service level. These concerns may translate into reduced sales and revenue as customers look to other suppliers or delay new transactions until they are confident the business will continue uninterrupted.
Employees become concerned – the death of a key employee can cause other employees to become concerned about the future of the company and their jobs. Your best employees could look for other employment to hedge their bets.
Financing could become strained – creditors could become concerned about the safety of the company’s credit worthiness due to potential disruption in the business, which could cause them to withhold new credit or request acceleration of outstanding loan payments.
Life insurance on your key people, payable to the business, provides the money needed to cover the direct costs of replacing the lost employee, and the indirect costs associated with internal disruptions and lost revenues.