- 29. Key Person Life Insurance
A small fortune could be lost by a firm searching for and training a replacement for the
loss of a key person. The loss of the intangible assets of a person could represent a
greater loss to the firm than the destruction of fixed assets by fire or flood.
A key person could be the owner of the business (the estate requiring liquidity); the
financial officer who arranges finances, controls costs, and makes the budgets; the sales
manager who trains the salesmen and
markets the products of the firm; the technician who creates and produces the products.
That loss of a key person could jeopardize the financing, planning, producing, and
marketing of the firm.
Key person insurance coverage will not replace the brains, innovation, and enthusiasm of
your key people. The cash from the plan will maintain your credit standing while a
replacement is found and developed. A
permanent whole life insurance contract provides both the funds in the event of the tragic
loss of the key employee as well as an asset fund to prepare for the replacement of a
retiring executive.
Whether the business is a proprietorship, partnership, or corporation; the business should
insure a key person in the same manner the business insures against the casualty loss of
the assets of the firm.
A Vital Consideration
If you lose a key person, how much will it cost your firm? Your major source of profits is
not capital or physical plant, but the skill and experience of the individuals responsible
for making the organization run. Their unanticipated loss can seriously affect the
stability of your business.
What Happens?
1. Good will evaporates
2. Credit lines are adjusted
3. Gains are made by competition because of your weakened position
4. Morale of other workers suffer
5. Money is spent searching for the key person's replacement
6. Money is spent in hiring and training the individual
7. Money is lost through errors as the individual gains experience
8. There's a substantial lowering of earnings
The overall effect can be greater than any physical disaster that could occur to your
plant or equipment.
Your Plan of Action
To avoid these losses, key person life insurance is the only reasonable answer. With this
plan, the firm buys life insurance on each key person. It owns the policies, and receives
the proceeds.
When the Person Dies...
The key person life insurance provides the cash to cover the financial loss to the firm.
It maintains the firm's credit. It assures uninter- rupted business operation. It pays for
the training of a replacement. It continues the key person's salary to the family for a
reasonable period of time.
If the Person Lives...
The cash value of the insurance can provide funds to finance the individual's retirement.
While the Person is on the job...
The cash value of the insurance provides a nontaxable reserve for business emergencies.
If He Resigns...
The cash value of the insurance will serve as a replacement fund to offset the loss of the
valuable services and experience of the key person.
Special Features...
The insurance proceeds paid to the firm are exempt from Federal Income Tax, so the excess
of the insurance proceeds over the premiums paid represents a tax-free addition to
surplus.
Tax reference verification 1-800-829-1040
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