DeNoble Financial Services

Key Man Insurance

Can your business survive if you were to die or become disabled? Would your family or some employees be able to fill the role you are playing?

Key man insurance might be a misnomer. It might better be called Vital Man Insurance. If you are the owner or CEO or President of a company, the chance that someone else could just pick up and run with it and succeed if you aren’t isn’t likely at all. The purpose for the policy on you is to provide money to keep things going- bills paid, payroll met- while decisions are made and a search is made to find a replacement. You have a policy for protecting your family. This is a policy to protect your business. Think of two scenarios. One, a business is growing and doing well. It projects a 20% growth for the coming year and is on track to meet it. As owner and president of the company, you are involved with contracts with clients. All of a sudden you die in an accident and there is no policy and no money going into the business. What will happen with the contracts? Who will monitor and steer the company to achieve the 20% growth? The chance for a loan to cover expenses is lessened by not having the key person in the business and all of a sudden, the growth isn’t the focus, but survival is. A second business, maybe the competitor of the first, has the same thing happen. The owner/president who is personally involved in all the client contracts, dies unexpectedly. In this case a Key Man life insurance policy had been purchased and now paid the company the benefit. The company didn’t have to go to the bank for money. It had the money to do a search and found a company in another city that was in the same industry. They were able to bring the ExVP from that company in as the new president. Shares had gone back to the business with some going to the new president. Over the year, that company grew 30% because they picked up contracts the other company couldn’t keep. The new president was granted the remaining shares after a great performance two years running. That is a simplistic, made up example, but ask yourself, is it far from reality. You might have a sinking fund for such an occurrence. My question is “Do you know when the need will arise and how much money will be in the fund then?” Life insurance is the best way by far to prepare for the worst day a company could experience.

Beyond the owner, CEO or President of the company, there are other people who are vital to the companies continued success. You know that without them, the company would face a real challenge. A key man policy on any of those people would again help the company survive their loss and find the replacement. These could be people with particular technical skills or a salesperson bringing in 40-50 percent of the company revenue. Losing these people would set the company back for some time. A life insurance policy simply provides cash to bridge the gap.

There are benefits and drawbacks to the use of the insurance. The drawback is that the premiums aren’t pretax. They are paid from general budget of the business. The benefit is that the payment then is tax free. For most businesses affording the payment now isn’t nearly as big as an issue as limiting the expenses after losing a key person and having a tax free fund to work with makes that easier and far better than a bank loan that is going to carry an interest rate.

Disability effects more businesses than death of key people. Lets say you have a partnership and one of the partners is the technical brains of the business. What would happen if that individual was disabled and couldn’t work for 8 months. What effect would that have on the business? Disability plans are taken out by individuals and provided by businesses because of the problems to the individual and their family if income is lost. The business needs to be protected in the same way. If you are the one disabled, you want the company to still be there when you are recovered.

There are rules regarding the use of these policies and we can go over them with you. They aren’t onerous, but need to be followed for the money to be tax free income. We will work with you to develop the best plan for your business. We have multiple carriers to find the right policy for the individual needs of any business.