Key Employee Coverage: 5 Options to Consider for Your Business Continuity Plan


Life insurance isn’t just for people. Many businesses benefit from purchasing life insurance for their key employees as part of their continued operations and succession planning. Seven in ten small businesses surveyed by the National Association of Insurance Commissioners said they were heavily dependent on one or two people for their success (The source). However, only two in 10 had a key person life insurance in place.

The emotional toll on family and family and the damage to corporate morale are the most painful effects of an employee’s death. However, it can also be financially devastating. Including life insurance in your risk management planning is especially critical for small, private businesses.

To illustrate, imagine what would happen to a small biotech startup that is about to develop a new product if its best scientist – the only employee with a full understanding of the technology – were to die or be permanently disabled. in an accident.

Creditors would likely be worried about the outstanding amount of the business business loans, which could reduce the company’s ability to refinance or access more credit. The startup is expected to invest significant resources in hiring a new, world-class researcher, and delays in product development could ruin their cash flow. If the key employee is also a shareholder in the business, it can also result in a large cash expenditure to buy out family members who inherit an interest in the business.

Even large companies are likely to lose key employees. Think about the impact the death of Paul Allen or Bill Gates would have had on Microsoft early on, or what would happen to Berkshire Hathaway’s stock price if they lost Warren Buffet.

The good news is that there are life and disability insurance options to help small businesses prepare for such tragedies. Let’s take a quick look at five popular insurance solutions that small businesses can consider.

  • Life insurance for key employees.
  • Disability insurance for key employees.
  • Complementary invalidity insurance.
  • Temporary corporate disability reduction insurance.
  • Business overhead insurance.

Here’s a summary of how each solution works and the benefits to the business.

Key employee life insurance

Key Employee Life Insurance provides businesses with cash flow when a key employee dies. The business is the owner and beneficiary of the life insurance policy and pays the premiums after tax. If permanent life insurance is used, the cash values ​​of the policy are available to the company through withdrawals and loans and may appear as a cash reserve on the company’s balance sheet. If there are several key employees in your business, you can sometimes save money by purchasing a first-to-die life insurance policy. This type of policy covers the first of the group of employees who dies. Once this happens, another employee becomes eligible for coverage. This option provides coverage to multiple employees, but the premiums reflect that only one person has coverage at a time.

Disability insurance for key employees

This option is similar to the Key Employee Life Insurance solution, but covers disability instead. If a key employer is disabled for longer than the preselected waiting period (for example, 90 days), the company receives monthly payments to mitigate the loss of the employee. Some companies offer disability protection as a benefit to their employees, and the funds from this policy can be used to fund these contractual obligations. Payments are also made by the business with after-tax dollars, but the benefits are non-taxable.

Business overhead insurance

Business overhead insurance is an option that allows businesses to hold the policy and pay it off with tax-deductible dollars. The policy will cover virtually all business expenses for the preselected period (usually up to three years). Money received from this policy is taxable. However, overhead costs paid with this money are still tax deductible. This solution is generally only used by small businesses. This can be a particularly attractive option for sole proprietors who must continue to pay overhead costs even though they cannot work.

Complementary invalidity insurance

Some companies offer supplemental disability insurance as a benefit for employees. Premiums are tax deductible and employees own the policies. This solution ensures that the key employee and their family are taken care of without forcing the company to make tough decisions, such as whether or not an employee has a disability or how much to pay for rehabilitation expenses.

Temporary disability insurance for business

Another option for businesses wishing to purchase coverage for a key employee’s disability is temporary business disability insurance. The policy works the same as standard supplemental disability insurance, but is used to pay off principal and interest on a business loan. The company uses after-tax premium payments, but the benefits are tax-exempt.

What is the next?

If you own a small business that depends on one or two key people, consider whether a life or disability insurance policy is a good option. Most small businesses rely on key employees and could benefit from some type of life or disability insurance for key employees.

Ask yourself how much it would cost to replace your key employees. How much income would you lose? Would you lose benefits that are difficult to quantify, such as valuable industry or community connections?

Business owners often like to say that people are the most important asset in their business. If this is the case in your business, it may be a good idea to insure your key workers.

This article was originally written on September 23, 2020.

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