The recent news about the health of Apple, Inc.’s visionary founder and CEO Steve Jobs should be food for considerable thought for even the smallest company. Apple no doubt has well-crafted plans in place to protect the company’s value in a post-Jobs environment. But not every business has Apple’s foresight or resources. According to a survey of 1,098 senior managers conducted recently by the American Management Association, only 14% reported that their companies were well-prepared for the loss of a key senior manager. How about your company? Are you prepared to weather the loss of a key employee on your leadership team? At bare minimum, you should consider key-man or key-person life insurance.
A key man life insurance policy will protect your company from the untimely death of a valued manager, executive, sales person or owner. A comprehensive policy will also include disability insurance in the event the insured is unable to perform his or her job because of sickness or injury. Typical candidates include employees whose skills, experience, knowledge and/or contacts are critical to your company’s ongoing success.
In the event the key person insured is disabled or injured, benefits from the policy are disbursed to the company. They are generally used to cover any short-term revenue deficits that result from the loss of the key person’s services. Key man benefits can also be used for any expenses involved in recruiting, hiring and training a replacement.
Key man life insurance is typically sold as an equity-building whole life policy. The company, not the individual insured, owns the policy and is the named beneficiary. In some instances, the premiums on a key man policy can declared as a tax deduction by the company, but only if those premiums are charged to the insured individual as taxable income. To make this more attractive for the key man, companies often use the cash value of the policy as a retirement benefit carrot to encourage the valued employee to hang in for the long-haul.
By law, in most instances and with only a couple specified exceptions, the employee being covered must be notified in writing that: a) you intend to insure his or her life; b) what the maximum face amount of the policy is at issue and; c) that the company/employer is the named beneficiary of any death benefits. You, the employer, must secure that key man’s written consent.