Several years ago, a large national company lost a number of its key executives in a helicopter accident on the way to a mountain ski slope. This highly-publicized tragedy and others like it across the nation have caused turmoil and loss to many companies large and small over the years. Of course, it is impossible to replace the lives that have been lost. However, it is very possible to replace their financial value through the use of “key person” life insurance, which pays a settlement to the company upon the death of its high-level employees.
Do you own a company? I am certain you have insured the building and its contents, which produce the goods and services for your company. But, have you considered your company’s biggest asset – its key employees? It is the brains of these valuable people that make a company run, not the machinery. If you had bought a machine worth $1 million and it was destroyed overnight, and someone forgot to insure it, would you be upset?
It is true that no one is indispensable. If your company’s president dies, it would not break the company, but it sure would bend the heck out of it. Remember, people at work are good “assets” because they are the ones who produce business income. The mere fact that it may not be known whether or not they can be replaced, or the exact cost of replacing them, should not deter you from insuring them. People are money-generators who can be lost much more easily than machines.
Some potential uses for key person life insurance proceeds are: purchasing company stock from the decedent’s estate; finding, recruiting and training a new employee; strengthening the credit position of the company; funding expansion plans; and providing a tax-free addition to company surplus.
Key person life insurance premiums are quite small in relation to the potential death benefit. Also, policies may be used to develop cash values. These values are added to the company’s balance sheet, helping to contribute to the value of the business and to its borrowing power. Borrowing against the cash values may also be a “lifesaving” source of dollars in times of financial crisis or opportunity. The cash values can be used to provide supplemental benefits at retirement to the key person.
The proceeds of $1 million of key person life insurance would be tax-free and would have a cost of a fraction of the $1 million. Because no taxes are due on the proceeds, it is equal to $2 million of earnings. In addition, if you earn 10 percent on your sales, that tax-free $1 million could be the equivalent of $20 million in new sales.
The Third Circuit U.S. Court of Appeals comments on key person insurance: “The business that insures its buildings, machines and automobiles from every possible hazard can hardly be expected to exercise less care in protecting itself against the loss of its most valuable assets – managerial skill and experience.”
Key person life insurance can provide peace of mind and should be an important part of both the present and future plans of any business, whether a large publicly-owned conglomerate or a small mom-and-pop store. Every business owner should consider purchasing this inexpensive coverage.