Should Your Company Provide Key Person Life Insurance?
In times like these, it could be vitally important for any business to protect against the loss of an employee that is considered key to the company’s success. This is why “key person” life insurance has become popular with small- to mid-range employers looking to protect their solvency in the event of losing an owner, a partner, a majority stockholder, a CFO, someone with a high level of expertise, or any other individual that would be financially difficult for the company to replace. In this manner, key person life insurance is used as a corporate benefit where the company is the beneficiary of the key individual’s life policy. Recently, however, more companies have been using this type of insurance as an attractive employee benefit that can draw key individuals, and other companies have started using it as a combination of the two. So, can either option work for your company? The following is a brief overview that may help to answer that question.
Key Person Life as a Corporate Benefit
Traditionally, a company would purchase a life insurance policy on the life of a key employee, and the proceeds of the policy are paid to the company to replace the lost monetary value of that person. Companies utilize this benefit because they understand the value this person provides and the need to replace it in the event of a premature death. While loans or cash can be used to fund the replacement cost associated with this type of event, these employers understand that life insurance can be a more cost-effective way to fund this obligation.
The proceeds from the policy are used by the company to hire and train a proper replacement for the key person, replace the employee’s contribution to profits, or maintain the confidence of clients and creditors. When used in this manner, key person life can often save businesses from financial ruin when the unexpected happens.
Key Person Life as an Employee Benefit
More recently, companies have been using key person life insurance as a tool to attract, retain and reward key employees. In this scenario, a company would pay for a policy on the key person’s life and allow the individual to choose the beneficiary and control the policy’s cash value, if applicable. The key person has the flexibility to change the beneficiary if so desired, and the policy proceeds pass on to the designated beneficiary.
The key person can also use any accumulated cash value in the policy as additional retirement benefits, if so desired. This is a unique way to add another attractive discretionary employee benefit to your overall benefits package.
Evaluating the Marketplace
If your company determines that key person life insurance is appropriate for someone in your organization, be sure to look for attractive and competitive premium rates in the marketplace, and secure the correct type of policy. Life insurance premium rates vary greatly from insurer to insurer, and if rates are two high, it may not prove cost-effective to purchase the policy. Your organization may also want to reevaluate any existing key person policies that are already in place, as the cost of life insurance has declined over recent years, and a policy analysis could be useful to determine if you are paying an appropriate premium.
For more information on key person insurance and how it is incorporated into overall corporate and employee benefits packages, please visit the following links:
Your Key People Might Be Worth Insuring
The Benefits of Providing Life Insurance for Key Employees
Key People, Key Protection – Key Person Life Insurance Could Save a Business
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Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.
August 14, 2009
Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.
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