You’ve got a great group working for
you now, and business is good. You know that much of that success is due to one
or two key people with both skills and personalities that are hard to match.
Suppose they were injured and out of work for a while, or suppose they died?
Would your business survive? Key employee life and disability insurance
coverage can help make sure that it does.
When bad things happen to good
Your key employees are those special
people with such unique skills and talents that they contribute greatly to the
financial success of your business. If a key employee were disabled and out of
work, or were to die, your business would suffer a financial loss. Here are
While the employee is out of work,
the revenue that he or she generates may substantially decrease
You’ll incur unexpected expenses
recruiting and training a temporary or permanent replacement
Less capable or inexperienced
employees trying to fill in can make mistakes or cause delays that cost you
If a key person dies, a business
loan may come due
Customers or even other employees
may look elsewhere, concerned for the future of the business after the loss of
a key employee
Key employee life and disability
insurance policies can help soften the impact of these blows. Generally
speaking, these policies are sold to small or medium-size businesses; it’s in
those operations that a single person can make the most difference to the
bottom line. If you own a large company that’s better able to absorb the financial
losses caused by losing a key employee, you may have difficulty buying the
coverage you desire.
If death does you part–key employee
Typically, your business purchases a
life insurance policy on a key employee, pays the premiums, and is the
beneficiary in the event of the employee’s death. As the owner of the policy,
the business may surrender it, borrow against it, and use either the cash value
or death benefits as the business sees fit.
In determining how much insurance
you’ll need, putting a dollar value on a key employee’s economic worth may be
difficult. Although there are no rules or formulas to follow, several possible
methods to determine the insurance amount may be used. The appropriate level of
coverage might be the cost of recruiting and training an adequate replacement.
Alternatively, the insurance amount might be the key employee’s annual salary
times the number of years a newly hired replacement might take to reach a
similar skill level. Finally, you might consider the key employee’s value in
terms of company profits; the level of insurance coverage might then be tied to
any anticipated profit loss.
The premiums you pay for key
employee life insurance are not a tax-deductible business expense for federal
income tax purposes, since your business is the recipient of the benefits.
Prior to August 16, 2006, the death benefits your company receives as the
beneficiary of the policy aren’t considered to be taxable income. But for
policies issued after August 16, 2006, proceeds from a life insurance policy
insuring the life of an employee and payable to the employer-policy owner may
be subject to income tax, unless an exception applies. Also, if your business
is a C corporation, the death benefits may increase the corporation’s liability
for the alternative minimum tax. You should consult a tax professional for
information on your circumstances.
Riding out the hurt–key employee
The death of a key employee isn’t
the only threat to your business. Suppose a key employee is injured or becomes
ill, and is out of work for an extended period? Disability insurance on such a
key employee is another way you can protect your business against any resultant
A critical part of key employee
disability insurance policies is the definition of disability. Usually, these
policies define disability as the inability of the employee to perform his or
her normal job duties due to injury or illness. As with life insurance, your
business buys a disability insurance policy on the employee, pays the premiums,
and is named as the beneficiary. When the employee is disabled, the insurance
coverage pays monthly disability benefits to your business. These benefits can
equal a certain percentage of the key person’s monthly salary, up to either a
maximum monthly limit or 100 percent of that salary. The benefits may be used
to pay the operating expenses of the business and to cover the expense of
finding a temporary or permanent replacement for the key employee.
The policies typically offer
elimination periods (i.e., the waiting period between the disability and when
the benefits begin) ranging from 30 to 180 days. Depending on the policy, your
business may receive the benefits for 6 to 18 months–long enough to allow the
key employee to return to work or to allow the company to replace the key
employee. The policy is normally a noncancelable contract, guaranteeing the
premiums and the coverage amount. A waiver of premium option can be an
important part of these policies. This option provides that, once the
elimination period has been satisfied, the insurance company will pay the
premiums as long as the disability lasts or until the benefit period ends.
Sometimes included in the base
disability policy coverage (or available as an optional benefit for an
additional premium) is personnel replacement expense coverage that pays for the
cost of finding and hiring a replacement for the key employee. These benefits
are usually payable after the key employee’s disability has lasted at least 6
months. Your business will be compensated for actual replacement expenses
incurred, including advertising costs, employment agency fees, and the first 3
months of the new employee’s salary.
As with key employee life insurance,
the premiums you pay for the key employee disability policy are not a
tax-deductible business expense. As a result, the benefits your business
receives are not generally considered taxable income.
This material was prepared by
Broadridge Investor Communication Solutions, Inc., and does not necessarily
represent the views of The Retirement Group or FSC Financial Corp. This
information should not be construed as investment advice. Neither the named
Representatives nor Broker/Dealer gives tax or legal advice. All information is
believed to be from reliable sources; however, we make no representation as to
its completeness or accuracy. The publisher is not engaged in rendering legal,
accounting or other professional services. If other expert assistance is
needed, the reader is advised to engage the services of a competent
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