Key Man Business Protection
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In every business there are a few individuals that are particularly important to the well-being of the company. In a closely-held business, this would typically be the owner(s) or high level manager(s) that drive the vision of the firm. If something were to happen to one of these employees, it could be a highly detrimental event for the organization. Thus, it is critical to have a plan in place to help support the business until a suitable replacement can be found or until the key employee is able to resume work.
There are several different ways to protect the company from an unexpected absence of a key employee, generally involving an insurance policy.
Key Man Life Insurance
Key man life insurance is a policy that protects the company should a key employee pass away. A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. If that individual unexpectedly passes away, the company receives the insurance death benefit. These policies help to mitigate the financial risk of losing a key contributor to the firm.
The death benefit is used to help pay expenses to find another qualified individual to fill the vacant position. In the case of a closely-held business, the death benefit proceeds can be used to pay off creditors, pay employee severance and close down the business in an orderly fashion. Without the assets from a life insurance policy, the firm may be in a situation where it would have to file for bankruptcy. Key man insurance should not be confused with a personal life insurance policy. This policy is not intended to provide for the heirs of a decedent.
Key Man Disability Insurance
Key man disability insurance, also known as a business overhead expense policy, protects the business should a key employee become disabled and is unable to work. Typically these policies are purchased for closely-held businesses where the owner or owners are key employees. If an organization relies on one or a few key persons for the income of the business, it could cripple the company should they be unable to work for a period of time.
Business overhead expense policies can pay to hire a temporary employee with the needed skill set, as well as to pay rent, utilities, employee salaries (excluding the key person’s salary), creditor payments, and more while the key person is unable to work. This type of policy could mean the difference between surviving a temporary hardship or a forced closure of the business.
Protecting a business against the unexpected loss of a key employee is critical to the continuity of the firm. Without an established plan to replace the income needed should a key employee become disabled or pass away, the company could be forced to close or take a substantial revenue loss. It is important to contact a professional that is able to determine which key man policies are right for a business and how much coverage is necessary. HD Vest Advisors are uniquely positioned to do just that while also understanding the tax consequences of any plan implemented.
