What could happen to my business if I lost a key employee?

A key employee may be a specialist who has knowledge that is critical to your organization (such as a programmer) or he or she may be a generalist who has key contacts, is highly efficient and/or drives production or sales. Regardless, losing such a person could result in:

• lost sales,
• unexpected termination or delay of important projects,
• a loss of lines of credit,
• a slowdown in productivity, or
• increased business expenses.

Can I protect my business against the loss of a key employee?

One popular method for protecting your business is life insurance. Your organization can buy coverage, often called key employee or key man insurance. Such a policy can minimize the potential for disaster since the following are among its benefits:

• provides funds for recruiting and hiring a replacement employee;
• creates a tax-free source of cash to help offset lost profits; and,
• assures customers and creditors that business will continue with as little disruption as possible.

What if my insured key employee lives until retirement?

While the key person works for you, the life insurance can still be valuable. The cash value life insurance can:

• provide a reserve fund;
• reinforce your business' credit worthiness;
• strengthen your key employee's loyalty; and
• (at retirement) be used to create or supplement retirement income.

How does Key Employee Insurance work?

Remembering that you will definitely need the help of your insurance agent and your attorney, it goes like this:

• a corporation purchases an insurance policy on the key employee's life,
• the amount of coverage is typically based on an estimate of the employee's value to the company,
• the business pays the premium and is the owner of the policy,
• the company appears as the beneficiary, collecting the benefit in a lump sum in the event that the key employee dies.

Making arrangements with an insurance or benefits professional and a lawyer is critical, since key employee insurance has legal and tax implications.

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