Business Planning: Key Person Life Insurance

The death of a key employee or business owner who is also a key employee can have a disastrous effect on a business. Some of the costs of such an event might include:

  • The financial cost (in time and dollars) to find, hire, and train a replacement.
  • Decreasing productivity which can lead to capital losses.
  • A need for cash to fulfill promises made to the deceased employee's spouse or family, such as salary continuation or deferred compensation.
  • The inability to seize a business opportunity because cash reserves are being used to recruit and train the new employee.
  • A loss of confidence among suppliers and customers in fulfilling business obligations.

Additional problems (if key employee is an owner) might include:

  • Disagreement between heirs and surviving business owners or key employees.
  • Lack of cash to buy the interest of the deceased owner, requiring a sale of the business to an unknown "outside third party."
  • Surviving owners may be forced to work with someone who is either not competent or not motivated enough to make the business thrive.
  • The business may have to be sold to pay estate taxes.

Options to Consider

Life Insurance Policies
Many business owners choose life insurance to protect themselves against the loss of a key employee. Life insurance premiums are small compared to funds from other sources, which would have to be quickly raised out of earnings or by borrowing when a death occurs. If permanent insurance policies are used, there can also be a cash value buildup, which may be available to the business in time of need. Loans, withdrawals, and other distributions will affect the policy values and net cash value and may affect the death benefit. 1

1Fluctuations in interest rates and/or policy charges may require the payment of additional premiums to keep the policy in force.

Transamerica Life (Bermuda) Ltd., and it's authorized representatives do not give tax or legal advice. The material provided is for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must rely solely upon their own tax and/or legal advisor regarding their particular situation.