A critical component to successful planning includes identifying the key employees of a business. A key employee is an employee or executive who is essential to the company’s operation and profitability.

Key employees can be critical salespeople, those with specialized skills such as engineers; an executive; an owner; or someone that develops intellectual property. There is no legal definition of who qualifies as a key employee.

If this employee would happen to leave the business, it could prove disastrous for the organization. The costs that a company can incur upon the loss of a key employee are high and range from the expense of hiring and training a replacement to the loss of sales connected to the loss of a key salesperson.

For this reason, companies should purchase a keyman insurance policy that will safeguard them against these losses. Ideally, keyman insurance is about protecting your business from the sudden loss of a key person. 

Keyman insurance can also be used in such a way to provide value, security, and incentives for key performers. It can be used to attract and retain employees and provide protection for the key employee’s family in death or disability.

Golden Handcuffs

This is sometimes referred to as golden handcuffs or a retention bonus if you offer them ownership of the policy and the policy’s cash value after they have been with the company for a specific time.   

This can be done through a restricted endorsement.  The transfer of policy ownership to your key person is currently exempt from taxation under the IRS transfer rules.  This is a flexible option, so rather than having the key person’s ownership “vest” after 10 years, you should have it vest in one-year increments on an annual basis to keep the incentive building.

If the policy vests to your key employee, the premiums can become tax-deductible for your business, and before vesting, while your business owns the policy, you can access the cash value for your business operations for all the other reasons discussed above.

A keyman insurance policy creates a private financing source for the business

Creating private financing so the company’s money never quits working

How would you like to have several dividend-paying, high cash-value life insurance policies building concurrently, providing your business with death benefit protection against the loss of key employees,  and building a private financing source with tax advantage growth?  A keyman insurance policy creates a private financing source for the business much, like a BOLI policy and an Banking Policy

Better than a Bonus

Bonuses are great. But do you want to pay a big bonus to a critical employee to have him or her leave you for a competitor? 

Better for Them-They do not need to wait until retirement

Many of the ways companies reward and retain valued employees is focused way too far into the future. Pension and retirement plans will not pay anything until retirement. Let us not forget the regulations, administrative headaches, costs, and the volatility of retirement plans.

Bottom Line

If you have someone critical to your business, it would be a wise idea to get some insurance on them to protect both you and your business.