As any business owner knows, when it comes to running a company, everyone counts. You can’t bring in money without a sales force. You can’t count the money without an accounting department. You can’t run the computers without an IT specialist. You can’t secure the building without security personnel. And you can’t keep the floors clean without the maintenance staff.
The same goes for every clerk, administrator, secretary, supervisor, manager and executive. Your business runs on the shoulders of many people in a variety of positions. Have you made sure that the loss of a key player won’t harm your business? (For more, see: How to Use Life Insurance as an Executive Benefit.)
Why Insurance Coverage Is Needed
While everyone is integral, some people play principal roles. For example, revenue may suffer if you lose a top salesperson and investors and shareholders might get anxious if you lose a chief executive. Clients and vendors might get nervous if a key manager leaves, and future production may be jeopardized if you lose a key technician, inventor, scientist or idea person.
These situations show why businesses insure leading personnel. They take out life insurance to protect themselves against the loss of men and women whose death could impair the operation. The insurance benefit protects you by giving you the time needed to recruit the right replacement. In the meantime, client service continues, bills get paid and employees have reassurance that the show will go on. Business can take place as normal.
Here are three quick tips for business owners to make the right decisions when insuring key personnel. (For related reading, see Asset Protection for the Business Owner.)
1. Determine the Policy’s Face Amount
How do you value the services of primary employees? Your answer to that question will vary according to the role they play. The service of a key chief executive would be assessed differently than the service of a key technician. Your firm’s accountant or chief financial officer should consult with an insurance company advisor to calculate the appropriate insurance benefit for your situation.
2. Decide on a Time Period
Key person coverage came about at a time when the main employees tended to make long-term commitments to their employers. Today, many key men and women tend to switch jobs more frequently. If you think that is the case in your business, then term insurance might be more applicable than permanent insurance.
3. Establish Your Options
What should you do with the policy on a vital person if he or she does leave? You have a number of options to choose from. You could simply terminate the policy or, if it is a cash value policy, you might be able to surrender it for value. In some cases, the former employer keeps the policy in force and collects the benefit when the former employee passes away. The policy may also be sold for cash in a life settlement depending on the age, medical condition of the insured and other factors related to the policy. (For more from this author, see: Using Life Insurance as a Business Succession Plan.)