Security for your business in a time of loss
Jeff Moses, president of Auto Custom Carpets, was on his way home from a business trip in Ohio when tragedy struck. The small airplane he was riding in lost control and crashed into a creek near Talladega, Alabama. The plane exploded upon impact, killing everyone on board.
Jeff Moses’ death left a huge void in the company’s leadership team. Not only was Moses the president and co-owner of Auto Custom Carpets, he was also a charismatic sales leader whose product knowledge and extensive industry experience were integral to the company’s success. Without Moses leading the way, the company could expect an immediate and precipitous drop in sales revenue.
The future of Auto Custom Carpets—and its 150 employees—hinged on the ability of the two remaining partners to quickly find and recruit a qualified replacement before the company’s working capital dried up. Thankfully, the executive team had the foresight to purchase a Key Person Life Insurance policy for each of the three partners.
Keys to success
Most organizations employ at least one individual who is essential to the company’s success. This person may be a partner, majority stockholder or an individual with expertise that is unmatched throughout the rest of the company. If this person’s exit from the company is planned, such as retirement or voluntary termination, then you can prepare for the loss and take the necessary precautions to minimize the impact. However, if the departure is unplanned due to a death, disabling accident or quitting on the spot, then the company will be exposed to financial risks.
Consider key person life insurance to offset your risk. This insurance solution can protect your organization’s solvency in the event that you lose the key person or people without warning, and also the investments made by lenders and investors to the company.
How Does Key Person Life Insurance Work?
Here’s a general guide detailing how key person life insurance can protect businesses:
- The employer purchases life insurance on the key individual(s).
- The employer is the beneficiary of the life insurance policy, and applies for and owns the policy. If the key employee dies prematurely, the policy pays out to the employer.
- Tax-free dollars from the policy can be put towards finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.
- The policy can be transferred to a departing key employee as a retirement benefit, or to a different key individual upon the retirement of the original key employee.
- The policy can be used to buy out the key employee’s shares or interest in the company.
- Premiums are based on several factors, including the key employee’s age, physical condition and health history. The amount of coverage also affects the premium.
Key person life insurance has a number of advantages:
- It can be easily implemented and does not require Internal Revenue Service (IRS) approval. A policy only requires an annual report to the IRS.
- Life insurance benefits are paid to the company tax-free.
- Customers, creditors, lenders and stockholders have the assurance that the business has a continuation plan and coverage in place.
- There is flexibility in how the funds can be used.
Lock up peace-of-mind for your business
In the case of Auto Custom Carpets, the infusion of capital from the Key Person Life policy enabled them to sign an experienced sales professional away from one of their competitors. Less than 30 days after the tragic crash, the company was back up and running at full speed.
Is your business similarly prepared to survive the loss of a key employee? Not sure? Contact General Southwest Insurance Agency at (480) 990-1900 to discuss whether Key Person Life Insurance is the right fit for you.
Information reprinted with permission from Zywave, Inc. © 2008, 2011, 2013 All Right Reserved.
