Key Person Life Insurance: Will the business outlive the demise of an executive or key employee?

By Jon Kidd

Key person insurance is an important component for small, medium-size and large businesses.  Key person insurance may be particularly important for medical practices, CPA firms, law practices and other professional corporations.

Businesses often depend on the expertise and talent of a small number of individuals for their success, as such, the death or disability of one of these key employees or executives may result in substantial economic damage or even the demise of the firm.  To avoid a negative financial impact, prudent companies acquire life insurance on key persons.   Due to the current economic landscape, cash-flow sensitive businesses are constantly looking for alternate methods of funding life insurance premiums.  Life insurance premium financing may be a way to leverage the insurable needs of corporations without dramatically impacting the businesses’ cashflow.

Business Coaches Lionel Baugh and Pilar Sanchez define a business as “a commercial profitable enterprise that works without you.”  Baugh remarks, “Every business owner should have this definition in mind, and work harder on the business than in the business, not only to achieve sustainable growth, but to have a real organization that can work without him or her. In order to achieve that goal, the organization needs to have a solid foundation with appropriate planning in the way of key person life insurance”.  Sanchez adds, “Business owners and corporations buy key person insurance to protect their company for potential issues that may arise from the death or disability of a key person.  At Action COACH Business Coaching, we advise our executive clients to avoid a failing plan by making the right investments into their short and long-term goals with resources allocated to a sustainable successful business.”  As an executive, business owner, or board member, you have a responsibility to your company to minimize business risk.  Key employee insurance is a cost effective way to mitigate business risks resulting from the disability or death of a critical contributor to your organization.

Once a company is established, business continuation or business succession planning becomes a critical component to continued growth.  Business succession planning addresses all potential contingencies that may affect a business or business owner including retirement, sale of a business to a related or third party, disability or death, all of which can be planned for with disability and life insurance coverage.  Many companies’ succession plan include a key employee to take over at some point in the future; some succession plans bring a new executive from the market but most transitions resulting in lowest turnover are from promotions within an organization.  In that regard, the following business succession facts and statistics are illustrative:

• On average, 45% of the business owner’s net worth is tied up in the business. (LIMRA International, Small Business Owners 2005 Report)
• Only 26% of small business owners have some type of succession plan in place. (LIMRA International, Small Business Owners 2005 Report)
• Fact: Many business owners are depending on the value of their business to fund their retirement.
• Less than 30% of family owned businesses survive to the 2nd generation and less than 12% to the 3rd generation with only a 3% survival rate to the 4th generation. (Joseph Astrachan, Ph.D., editor, Family Business Review)

In conclusion, businesses desiring to minimize risk and prevent potentially devastating effects caused by the death or disability of a top employee or executive should own key man disability and life insurance.  Understandably, there is no better time to learn about the option of financing such policies.
Lionel & Pilar may be reached at 305-456-8561 or 786-205-40-01.  You may also wish to visit their website at www.actioncoach.com/lionelbaugh or to email them directly at pilarsanchez@actioncoach.com.

Jon Kidd may be reached via phone at 305-695-8052×106 or toll-free at 800-828-ESTATE (3782).  The office of Banyan Life Financial is located at 1800 Sunset Harbour Drive, Marina Suite 3, Miami Beach, FL 33139.  You may also wish to visit their website at www.BanyanLife.com or to email Jon directly at Jon.Kidd@BanyanLife.com.

This entry was posted on Monday, September 28th, 2009 at 3:01 pm and is filed under Life Insurance Premium Financing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.