Have You Insured Your Company's Most Valuable Resource?

Agency Sales,  Jan 2005  by Cashdollar, Steve

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If you're a business owner, you may have wondered whether your company needs to provide life insurance to cover the loss of a key person should they die unexpectedly. Consider the example of one 10-employee agency. Jack was responsible for 40% of new business each year. When he unexpectedly died, the company's revenues dropped by 25% the following year.

Jack was clearly a key person for the manufacturers' rep firm, one whose loss had a severe negative financial impact on the small company. Many businesses rely on people like Jack - employees whose value to the company would be difficult or expensive to replace. For a manufacturers' rep it may be the owner of the business, or a key rep. For a restaurant, it may be the chef!

Insuring a key person can spell the difference between the failure and survival of a business. Take another example. Tom and Art were partners. When Art died, his wife Betsy took over his share of the business. Since the business did not provide key person insurance, Tom could not afford to buy out Betsy. Their constant disagreements created an unpleasant working atmosphere and they lost business and some of their employees. Eventually, Tom let Betsy buy him out at a far lower value than he would have received at the time of Art's death had they both been covered.

Key Person Insurance

Key person life insurance can help a company survive by minimizing the organizational loss and fiscal strain that follow the death of a key employee and by helping to assure that:

* Business loans or investments can be repaid. When a key person dies (especially an owner), a lender may have the right to call the loan. The life insurance proceeds can help pay off that loan.

* Credit can be maintained. At the death of a key person, lenders may become reluctant to lend new money to the business or refinance outstanding loans. The life insurance can help the firm maintain its credit rating by allowing it to pay its bills in a timely manner in spite of the death. It also demonstrates to the lender that the firm is well-managed.

* A replacement can be recruited and trained. Months may pass before a qualified candidate can be found. Then it may take time to train him/her to the point where the replacement is as competent as the predecessor. There may also be a recruiter's fee to pay. So the life insurance proceeds buy time for the business.

* The business is indemnified for lost sales and prof' its if a key person dies. Insurance proceeds can help offset the future loss in revenue that will probably occur, at least temporarily, when a key person dies.

* Stock can be repurchased. If the business is a corporation, any common stock owned by the key employee can be repurchased with the insurance proceeds. This enables a partner to buy out a deceased partner's share.

Who Needs Key Person Insurance?

With key person life insurance, the business owns the policy, pays the premiums and is the beneficiary. Many businesses buy permanent (cash value) life insurance, although term policies can also be used. As with any insurance, premiums will vary based on the age, physical condition, and health history of the insured.

Does your company need key person insurance? That depends on your structure and business con.' tinuation plan, as well as the amount of financial hardship potentially faced without a key person.

Not all businesses need key person insurance. In large companies, there may be less likelihood that a single individual or small group is indispensable to a company's continued success. In one-person firms, however, the business will almost certainly not survive without the principal, no matter how much money is available.

Some partnerships will most likely have a greater need for key person coverage during their early years. As the partners' pensions, profit sharing, and net worth grow, insurance may become less necessary for the practice's survival. If you have outstanding loans, many lenders offer and even require credit insurance. In such cases, key person insurance may be redundant.

For most small- to medium-sized businesses, however, key person insurance should be considered. To determine whether your business needs this coverage, think about what would happen if an owner or key salesperson were no longer a part of the business. How much would you lose in revenues, sales, goodwill or expertise? How much would it cost to replace these lost assets?

Buying key person life insurance may be a relatively small expense - one you hope you'll never have to collect on. But failure to invest in a key person policy - and then having a key person die - can mean enormous expense. Your company can absorb small expenses; big expenses can absorb your company.

Steve Cashdollar h a public speaker and financial consultant. He is a registered representative and offers securities through AXA Advisors, LLC (member NASD, SIPC), 8720 Castle Creek Parkway, Suite 231, Indianapolis, IN 46250; and offers annuity and insurance products through an insurance general agency affiliate, AXA Network, LLC and its subsidiaries.

Copyright Manufacturers' Agents National Association Jan 2005
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