Why Do I Need Key Employee Insurance?

 

The untimely death of a key employee creates a devastating and major distraction for small to medium-sized businesses. Many businesses depend heavily on key managers or employees who have unique skills and knowledge. Consequences of such an event might include:
 

• The financial cost (in time and dollars) to find, hire, and train a replacement.
   

• A decline in the performance levels of other employees, resulting in missed deadlines, deteriorating morale, or increased personality conflicts.
   

• 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 personnel resources are diverted to address the consequences of losing the key employee

 

Insurance to Cover the Loss of a Key Employee

Instead of withdrawing funds from the company’s reserves or borrowing, most companies can best prepare for the loss of a key employee through forms of life insurance, designed specifically to target this challenge. The premiums on Key Employee policies are nominal when compared to the lump sum which would have to be quickly raised out of earnings or by borrowing. Although the premiums paid on the life insurance policy are not a deductible business expense, the proceeds at death are generally received free of federal income taxes to the company.

 

The value of the death benefit for Key Employee insurance can be calculated in a number of ways: as a multiple of the individual’s total annual compensation, as a multiple of the person’s estimated annual contribution to profit, or on the basis of key employee replacement costs (selection, hiring, and training). Lost opportunity costs resulting from the employee’s death can also be added into any of these calculations.

 

Key Employee life insurance is an indispensable part of any company’s planning for future contingencies. In short, the cost is minimal when compared to the potential financial burden that the loss of critical personnel can have on any business.