What Would Happen if You Lost Your Most Valuable, Irreplaceable Employee

It’s a nightmare, but it’s one businesses deal with every day: What would happen to your business if something were to happen to a key employee?

Think through the process: If you lost your top revenue producer, let’s say, or a key executive with decades of experience and industry contacts, or your top technician? A partner? What would it cost your company, both directly and indirectly?

• Will you have to replace profits from monthly sales?
• Will you have to shut down the business entirely while you find a replacement?
• What will it take to advertise and recruit someone to fill those big shoes?
• Will you need to pay a hiring or signing bonus?
• Will key customers begin courting your competitors, leading to a long-term reduction in your sales, far beyond the immediate crisis?
• Will the resale value of your company be significantly damaged?
• Will your creditors become concerned about your solvency, and begin calling loans or closing lines of credit?
• Can you keep making rent, tax, and equipment lease payments in the weeks and months following the loss of a key employee?
• Will your company have to pay dividends to a deceased partner’s heirs, long after the partner is around to contribute to the company’s success?
• Will you be able to make your payroll?

Keep in mind that you may have the same problems, even if your key employee is disabled, rather than dies. This isn’t just a life insurance issue. You should consider protecting your business against a key person’s disability, as well.

Fortunately, such protection is available – at a surprisingly low cost. Here’s how it works:

Key Person Life Insurance

Employers have an insurable interest in the lives of their employees. Companies therefore frequently take out a life insurance policy on the lives of select key individuals. The company owns the policy, and frequently names itself the beneficiary of the life insurance policy. If the employee should die, the life insurance policy provides the cash the company needs to navigate the crisis. It does so within days of the employee’s death.

If the policy is a permanent life insurance policy, the company also has access to any policy cash values. These cash values can act as a valuable source of reserves, over time. Plus, the company can generally access growth in cash values via loans on a tax-free basis, in most cases. Some companies retain these reserves; others use the cash value to bonus key employees for meeting longevity or performance goals to encourage the employee to stay with the company.

Premiums aren’t tax deductible, but any death benefits your company receives are generally tax-free. In some cases, however, life insurance proceeds can increase the exposure of C corporations to the corporate alternative minimum income tax. Consult a licensed tax professional for specifics on how the AMT might affect your business.

Key Employee Disability Insurance

Business owners should pay careful attention to the precise language defining a covered disability in any key person disability insurance policy. Some cheaper policies will only pay out in a limited number of scenarios. For example, policies that use a so-called “any occ” definition of disability will not pay benefits if the disabled worker is capable of working in any occupation at all reasonable, given the worker’s education and skill set.

The last thing you want is to be paying premiums on a policy for years and not be able to collect when the need arises. Most businesses who can afford coverage opt for an “own occ” definition of disability – at least for a set amount of time after the onset of the disability. In other words, with these policies, insurance carriers commit to paying promised benefits if the disabled individual can no longer work in his or her own occupation – a much more beneficial definition for the policy owner than the “any occ” definition.

Limitations and Other Considerations

You can expect an “exclusionary” period, which must elapse before any benefits are payable. This could be anywhere from 30 days to a year. The longer the exclusionary period, the lower the premiums, all other things being equal.

Taxation of Disability Insurance

Generally, premiums for disability insurance bought by the employer, with the employer as beneficiary, are not tax-deductible. However, business overhead insurance is generally tax deductible to the business. The general rule is that the business must either pay taxes on money spent on premiums, or it must pay taxes on benefits. If premiums are deducted, the benefit becomes taxable.

Setting Up Protection

Generally, business owners can set up protection quickly and easily for a low monthly premium. There is usually some underwriting involved. However, in many cases, insurance companies can ‘bind’ coverage during the application process, provided the key employee qualifies medically and the company financially qualifies for coverage. This can be done with the receipt of a month’s premium, in most cases.

If you or your business would incur a substantial financial hardship if a key worker, manager or partner were to be injured or killed, then insuring against that devastating risk may make excellent sense.

To learn more about coverage options and to protect your business, contact me at (248) 233-6170 or online at endeavoragencies.com.

Denny Carter
Insurance Advisor
Personal and Small Business Specialist
Phone 248-233-6170
Mobile 248 252-1088
dcarter@endeavoragencies.com

Figuring Out How Much Life Insurance you Need

Unpredictable job and investment markets make it difficult to determine how much life insurance to buy. The standard formulas for buying coverage to match a specific percentage of income are inadequate solutions. Online calculation tools usually tell everyone to raise their coverage by $1 million. However, life insurance is a personal issue. For example, a married couple with three children and a mortgage will need more coverage than a childless couple without a mortgage. When the markets are down, many people are tempted to shirk their life insurance needs. Major life changes also affect how people deal with their individual needs. It is best to take a systematic approach to buying coverage instead of relying on standard rules and formulas.

One Simple Strategy

The main purpose of life insurance is to provide survivors with enough funds to pay the final expenses and continue life comfortably. This is why most calculators are programmed to suggest a chunk of money equal to at least 20 years of regular income. With overall longer life expectancy and a lower savings yield, this may be too high of a goal for most people. There is a much simpler strategy for figuring out exactly how much insurance is needed. It is also better to buy from a plan that is easy to update. After projecting personal needs from the following four categories, assess the situation to see if extra coverage or different policies are needed.

1. Debts & Mortgages. Write down the total of all auto loans, mortgages, student loans and any other debts. All of these debts may be a serious burden for survivors to handle. However, survivors may choose to keep up mortgage payments. Be sure to allow enough money that this will be possible.
2. Final Expenses. Traditional funerals may cost between $10,000 and $20,000. While pre-planning a funeral is beneficial, it is even more important to ensure enough life insurance funds are available to pay the final bill. For a reasonable funeral figure, aim for $15,000.
3. Income Replacement. Families will not need 100 percent of the policyholder’s current income. Be sure to deduct final expenses, education costs and debts. As a rule, it is best to plan on replacing 50 percent of pretax income until retirement. This amount can be placed in a lump sum by dividing 50 percent of annual income by 0.05.
4. Education Expenses. This may be one of the most difficult calculations. Each school varies in tuition costs, and the tuition rates may be much different by the time children are ready to enroll in college. The average cost of college tuition has been rising by about five percent each year. This is the same rate life insurance is expected to grow over time. Calculate the future cost of tuition at the desired colleges, and add the amount to a life insurance policy.

To determine how much life insurance is needed, add all four of these categories’ totals. If there is no pension, it is beneficial to increase the amount. However, if a spouse earns a considerable salary, it may be feasible to decrease the total. For family members with unique or troublesome medical conditions, add between $100,000 and $250,000. The overall total usually adds up to a six-figure amount or slightly over $1 million. Increasing a death benefit on a term life insurance policy usually costs several hundred dollars each year, so the premium amount should not be impossible to pay. To get a better idea of what to expect for a premium, discuss the figures with an agent.

Getting married, having children, buying property and retiring are all life steps that require more life insurance. There are many different options for this coverage. Young and healthy individuals can usually lock in a low price for many years. Some policies also come with the option to convert to permanent coverage, which can be kept regardless of future health conditions. Term life becomes expensive after age 65, so it is a smart idea to consider whole or universal policies.

To determine the best coverage option for your needs, please contact me at (248) 233-6170 or online at endeavoragencies.com.

Denny Carter
Insurance Advisor
Personal and Small Business Specialist
Phone 248-233-6170
Mobile 248 252-1088
dcarter@endeavoragencies.com