The Use of Permanent Insurance for a Key Person

What Is a Key Person?

• A key person is an individual whose contributions and expertise are invaluable to the company. These individuals possess a unique set of skills crucial to the company's success, and the business owners or shareholders acknowledge they cannot easily be replaced. Essentially, should a key employee die tragically or become disabled to an extent that prevents him from working, his loss would have negative ramifications for the company, including financial strain or even ruin. These employees often hold titles such as founder, director, vice president, partner and key salesperson.
  
  

What Is Permanent Key Person Insurance?

• In some ways similar to personal life or disability insurance, permanent key person insurance is a policy the company takes out on a valuable, key employee (who must, by law, know he is being covered). The business owns this cash-value policy, and, therefore, it pays the premium for the key employee’s lifetime or until the policy matures when the key employee reaches between 95 and 100 years old. Should the covered key employee die, the business is the beneficiary, and it collects the death benefit, which is put to use to blunt the financial blow of the sudden loss of an integral employee. If the covered key person elects to leave the company, the policy can be transferred to his replacement. Because permanent insurance has a cash value, it can also be used to buy out the deceased key employee's shares in the business.
  
  

Maintaining a Business

• Since key employees have a significant impact on the bottom line, the sudden loss of such a critical member of the team may lead to an immediate spike in financial expenditures, not to mention a loss of productivity as co-workers mourn the unexpected loss of an important member of the business. The death benefit paid to the company will help to offset these difficulties by funding the search for a qualified replacement, providing extra cash and time to reorganize job roles and delegate new responsibilities, as well as hiring additional or temporary staff to help employees endure a difficult and emotional transition. These funds also can be used to pay off company debt — a valuable benefit that could realistically save a business from going under.
  
  

Closing a Business

• When such a tragedy strikes, the smaller the company, the bigger the impact. In some cases, the surviving partners or investors choose to fold up shop and walk away from what they see as an unsustainable business. In these situations, the company can use the policy proceeds to offer a severance to employees, pay off any outstanding credit and, in most cases, provide a decent sum to the deceased's family members to assuage the financial and emotional loss they have suffered. The investors, partners or other key personnel can distribute the remaining funds among themselves. Permanent key person insurance makes closing a business in the face of unforeseen tragedy a dignified alternative.
  
  

Use as an Employee Incentive and Retention Plan

• A key employee's special skills and relationships makes her a valuable asset — not only to your business, but to your competitors as well. Ultimately, it is just as easy to lose a key employee to a competitor as it is to death, so many employers have found that a permanent life insurance policy can serve as a powerful incentive for retaining or attracting key employees. The incentive can come in a number of forms. The company can purchase and pay the premiums of a separate policy that is owned by the key person and names her family as beneficiaries. The company also could transfer the whole policy or use a predetermined amount of its assets to fund a healthy retirement for the key person.