| Article Index |
|---|
| The Benefits of Providing Life Insurance for Key Employees |
| Page 2 |
| All Pages |
Page 1 of 2
Most people can appreciate why an individual should purchase life insurance: to help provide important financial protection for loved ones. What many people don’t realize is that life insurance also can play an important role in a business, particularly with regard to key employees. Key employees are the foundation of a good business. They are owners, sales directors, CFOs and others who are sources of leadership and profitability in a business—and who would be extremely difficult to replace, should they die unexpectedly. Not only can insurance protection for a key employee help avert a potentially devastating blow to a business, many banks and venture firms insist on key employee insurance protection to help offset a loan. The following information can help you weigh the merits of purchasing insurance for the key employee(s) in your company.
A Cost-Effective Way to Fund a Key Employee Plan
The main purpose of insuring a key employee is to help the business get through potentially difficult times, should that individual die unexpectedly. Depending on who the key employee is, the business may need funds to hire and train replacements, replace an employee’s contribution to profits, and/or maintain the confidence of clients and creditors.
While cash or loans can be used to help fund a plan to protect key employees, using life insurance to do so is a cost-effective alternative. Using cash can take essential money out of the day-to-day running of the business, and there is a danger that having accumulated cash savings at the business’ disposal may prove too tempting when other expenses and needs arise. Loans come with their own disadvantages, not the least of which is that the business will have to repay the loan, plus interest. And, the company’s credit may be adversely affected due to greater debt.
On the other hand, funding with life insurance is easy to administer, funds are available even if death occurs tomorrow, and although the premiums are not deductible, insurance proceeds at death are usually received income-tax free to the business. When funding a key employee plan with life insurance, the business, as the potential policyowner, applies for a life insurance policy on the life of a key employee, naming itself as beneficiary of the policy. At the key employee’s death, the employer receives the death benefit, usually income tax-free.
Life Insurance and Access to Credit
Many bankers would agree that life insurance is an important player in the credit game. Any time a lender is dealing with a business that has a key employee whose loss would disrupt the business, the lender will look to life insurance as a means of secondary collateral. This is especially true in situations involving a sole proprietorship or other closely held businesses. In some cases, banks and venture capital companies make key person life insurance—with benefits assigned to the bank—part of the approval process. Lenders and venture capitalists may also look at the overall presence of life insurance as a sign of character and willingness to meet responsibilities.
| < Prev |
|---|
