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Key Man Insurance

Key Man Insurance

Every business has some key individuals who are important to the company’s success. They could be the Founder, a successful salesperson, or the head of operations. As businesses grow, the number of people critical to ongoing success increases.

The loss of key people is a great vulnerability that can wake up senior leadership at 4:00 AM. To address this vulnerability, first ensure that key personnel are satisfied employees. If there are points of discontent, address them within reasonable bounds. But, don’t be held hostage.

Second, for key people who are on the verge of retirement, make sure their legacy is retained in the firm. Figure out how to codify their unique knowledge.

Third and most importantly, protect the firm. Doug McClure, CEO of Global Investment Strategies, took this complex issue and streamlined it to a simple clear solution. Doug said:

“Investigate Key Man Insurance policies on the critical personnel who would have profound and lasting negative impacts on the firm if they left or retired. Think about it. A business insures the trucks, buildings, equipment, etc. needed to keep the company going. If people are truly the most important asset a company has, then it only makes sense to insure the key people in that asset pool. Doing otherwise is fiduciarily irresponsible.”

There are four types of Key Man Insurance:

Z

Basic

This type of corporate owned life insurance is purchased to insure the company against the loss of a key employee.

SERP

(Supplemental Retirement Planning). Retirement Plans (SERPs) provide an attractive opportunity for rewarding valuable executives who need additional retirement income.

Double and Single Bonus Compensation

These plans are designed to provide additional compensation to selective key personnel.

Death Benefit Only Plan

In a Death Benefit Only plan, an employer promises to provide a benefit to a participant’s designated beneficiary in the event of the participant’s death.

Basic

This type of corporate owned life insurance is purchased to insure the company against the loss of a key employee. Replacing a key employee can cause loss of sales, operational inefficiency, and other personnel defection. Having a Life insurance policy provides a financial cushion to the company until a satisfactory replacement has been installed and trained can save a growing business or help to smooth out the loss of profitability.

SERP (Supplemental Retirement Planning)

Retirement Plans (SERPs) provide an attractive opportunity for rewarding valuable executives who need additional retirement income. Employer-funded, SERPs are designed to reward executives who remain in the company’s employment, devoting time and attention to building the profitability of the business.

Not only do SERPs provide needed benefits to select executives, but they also allow the employer to maintain control of the funding mechanism, Life Insurance. In this way, the employer maintains the loyalty of the executive, using “golden handcuffs” in a cost-effective manner. These policies are owned by the corporation and are considered a long-term asset. Income provided to the executive can be recaptured though additional loans or death of the key man effectively costing the corporation limited or no cost.

Double and Single Bonus Compensation

These plans are designed to provide additional compensation to selective key personnel. The dollars contributed to the plan are deductible to the corporation as employee pay, and are taxable to the executive. The benefit to the employee is a funded retirement plan and the company additionally bonuses the tax consequence to the employee (single bonus). The double bonus is an additional bonus to cover the tax consequence of the bonus. These plans are good methods to retain quality franchise players that will not leave.

Death Benefit Only Plan

In a Death Benefit Only plan, an employer promises to provide a benefit to a participant’s designated beneficiary in the event of the participant’s death. The Plan designates the corporation as the beneficiary of the policy with a secondary employee agreement providing the Deceased employee’s family with a funded death benefit. This eliminates the need for the employee to fund a policy with after tax dollars.

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