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08.18.05
How
Do You Protect Your Business From The Loss Of A Key Employee?
 By Keith
Muth
Key people are vital to your business. The loss of one or more of your key employees
can cause disastrous problems. Sales may be lost. Credit can become more difficult
to obtain. Profits may shrink, momentum may be lost, and training a replacement
will cost you time and money.
Life insurance on key employees can provide a business with a cushion to absorb
the shock of such a loss. Most astute business owners insure physical assets from
destruction. But when it comes to a business owner's most valuable assets-key
employees-many forget to take the same precautions.
To protect your business you might consider an insurance policy that protects
a business when an essential employee dies. The employer pays premiums for an
insurance policy on the key employee's life. The employer is the owner and beneficiary.
At the key employee's death, the employer receives the policy's tax-free death
benefit.*
During the life of the key employee, cash values accumulate tax-deferred free
every year. The cash values also generate an asset on the business' balance sheet
that can be used to create a reserve fund for opportunities and emergencies. It
can also form the basis of a deferred compensation or a split dollar insurance
program for the key employee. When the key employee retires, the benefit can be
transferred to him or her. After the key employee's death, the tax-free proceeds
provide funds to hire and train a new key employee, replace lost sales and profits
and provide a death benefit for the employee's family or stock redemption (both
complete and partial)*. These funds also help assure customers and creditors of
the business' solid financial position during this transitional time.
A business should protect itself against the loss of its most valuable asset:
key employees. Key person insurance is a business' best means of protecting itself
from the loss of these important people. Good management dictates that employers
protect themselves from this risk. If you employ anyone whose sudden, unexpected
loss would significantly affect your sales, profits and credit, then you should
consider key person insurance.
*In some corporations, the death benefit may be subject to the corporate alternative
minimum tax.
About the Author:
Keith Muth is a shareholder and Managing Partner for Virginia Asset Management (www.vamcompanies.com) which serves the greater Virginia area including Virginia Beach and Norfolk. He is a Certified Public Accountant, a Chartered Financial Analyst, and a Certified Financial Planner -- one of only 158 people nationwide who hold all three of these prestigious designations. He is also a Securities Principal and an Investment Advisor Representative of Securian Financial Services, Inc . and holds a five-star rating with the Paladin Registry. |
