People usually think of individuals
buying term life insurance for personal
use...that is to protect their families.
There are actually many
business uses of
term life and protecting against the
lost of a key employee is one of the
most common and perhaps most important.
Let's understand how a key employee life
policy can protect your company's most
valuable assets.
The
bulk of companies in the U.S. are small
business with 1-5 employees. The
IBM's and Coca Cola's of the world
occupy our thoughts of what a company is
but that's not the real story.
Most companies are small...even family
businesses. This runs the gamut
from architects, real estate agents, to
piano teachers. If you think about
it, most small companies revolve around
1 or 2 individuals whose expertise, work
ethic, or talent is the foundation for
the entire company. This can be a
mechanic's years of knowledge, an
attorney's ability in the courtroom, or
an artist's creative vision. Quite
often, it's the shear ability to get
work done well. Don't underestimate
drive and ambition to move a company.
This same concentration of ability and
focus that drives success is also a
potential liability for the entire
company. If that person passes
away, then what? In most cases
where the company does not have key
employee life insurance, the company
will find itself in a great deal of
trouble. How many stories have we
heard of spouses, partners, children
running successful businesses into the
ground? Is there a way to protect
against this?
Yes
and fortunately, it's
affordable term
life for a key person.
Essentially, the company takes out a term
life policy on an employee who's lost
would be catastrophic (or just really
really bad) for a company to function as
a going concern. The company would
be the life insurance beneficiary in
this case. How exactly would this
play out? Let's look at the example of a
star programmer who's ongoing work is
the core framework upon which a small
software company's business is built.
This employee has given some percentage
of ownership in the company (let's say
10%) and the is paid well for his/her
services. It's a small 5 person
company. This key employee passes
away. Luckily, the company had a
key person life insurance plan taken out
on him which was issued at the time of
employment and on which, employment was
contingent upon. The company can
now take the proceeds of the
life
insurance plan and use it to find and
hire a qualified replacement.
Maybe even more importantly, the benefit
will allow the company to navigate the
down time or interim till someone of
equal ability can be brought on board.
It make take a year to successfully find
a replacement which means lost income
and revenue. The term life benefit
can help to mediate this period of time.
In
this respect, you can think of key
person life insurance almost as a
replacement of income derived from one
person's ability to the company (instead
of the family). In our other
articles, we talk about term life used
to replace income to family resulting
from the loss of an earner. In
this case, the amount of benefit can be
calculated based on what is required to
1) keep the company afloat during the
loss and; 2) successfully find and
secure replacement. Due to this,
the term life length might be less
important (other than for true family
businesses) than the amount. 20
years of term life coverage probably
doesn't make sense at $50K. 10
years of term at $500K might be a better
fit for key person if you need to stay
within a certain budget. A lot can
change in the life of a company and
people move around quite a bit.
You would hope that the company has
provided for other options and resources
after a certain period of time.
This
calculation is ultimately dependent on
many criteria that differ from company
to company. We would be happy to
help you run a
term life insurance quote
with different mixes of term length and
amounts of coverage to find the right
balance for your key employee term life
insurance.
|