Under Written by
United of Omaha Life Insurance Company
A mutual of Omaha Company
One of the oldest sayings in business is that your employees are your most valuable asset. That’s because they are the face of your organization, they influence the bottom line and bring the skills and knowledge needed to make things tick.
And every organization has employees that they just can’t do without. Someone who is so integral to your success, you can’t imagine doing business without them. Those are your key people, and when the success of your business hinges on them, it may make sense to protect them with key person insurance.
What Costs Are Associated With the Death of a Key Person?
Losing a key person from your business can have negative effects that run throughout the organization. Some of them directly affect the bottom line, while others can have negative long-term effects:
• The loss can impact earnings from a lack of sales, affecting outside financing and creating internal inefficiencies from the loss of the key person.
• The death of a key person can mean the loss of skill or knowledge that is integral to the business.
• Customers who have built a relationship with the key person who has died may have concerns about the business and its ability to continue to provide them with the service they need.
• The death of the key person can be concerning to creditors and create holds on new credit or accelerate requests to pay back loans.
• Costs for recruiting and training a replacement for the key person can be significant.
• As the replacement learns the ropes of their new role, they likely won’t be as productive or generate as much income as the key person.
What is Key Person Insurance?
Simply put, key person insurance is when a business takes out a life insurance policy on an essential employee. The business pays all the premiums and owns the policy. In the event this key person passes away, the business will receive a death benefit that can be used to sustain the business as it recovers from the loss.
How Can Key Person Insurance Protect You From Those Costs?
The cash liquidity that comes with the death benefit following the loss of a key person provides your business with the financial flexibility to recover from your loss, no matter what your challenges are. Whether you need cash to maintain profitability, pay loans and strengthen credit, or pay employee salaries, a life insurance policy on a key person can help.
How to identify who these key people are?
• Who does your business count on the most?
• Who makes the most money for the company?
• Who do you miss the most when they are out?
• Who has the most contact with clients?
These questions can help you find employees or executives who are crucial to your business, and for whom you should have a plan if they were to pass away.
An Example of How You Can Use Key Person Insurance
Dan Isaacson is a 45-year-old skilled architect who has been employed by Davis Construction for 18 years. Dan has played a significant role in building the business.
Alex Davis is the owner and founder of Davis Construction, and he understands how important it is to plan for the unexpected, especially when it affects the success of his business. Alex decides to purchase a cash value life insurance policy in case Dan dies unexpectedly.
Dan currently earns $100,000 annually and Alex has determined that it will take five times Dan’s current income to replace him and recover any lost business costs in the event of Dan’s unexpected death.
After spending three years training his replacement, Dan is ready to retire at age 65. Davis Construction has a few options:
• The business can surrender the policy and keep the cash value
• The business can surrender the policy, keeping the premium it paid, and pays the cash value gain to Dan as a retirement bonus
• The business can surrender the policy, paying it all to Dan as a retirement bonus
• The business can transfer the policy to Dan if Dan wants to continue paying premiums and keep the policy as a personal insurance policy
*The purpose of this example is to illustrate a concept. Specific tax or legal questions should be directed to your tax or legal counsel
Why Mutual of Omaha?
Over 50 years of Mutual of Omaha’s the Wild Kingdom taught us that the animal kingdom and the human kingdom have something in common … an instinct to protect what matters most. Through insurance and financial products, we help people protect their lives, protect their families, protect their kingdoms.
