Key Employee Insurance

Key employees are usually trusted and liked by businesses that depend on them. You need to make your company's financial situation outstanding so key employees will want to stay.


1. Who Are Key Employees

The basis of a thriving or successful business is key employees. The people that are an asset to your business or imperative to your business success are considered key employees. Key employees also have a huge impact on how much the company earns. Negative consequences are liable to occur if a business loses a key employee. Key employees have leadership skills and add profitability to the company. Some individuals are so good when interacting with customers and creditors that business owners think of them as key employees. Entertainers, attorneys, and professional athletes are also considered key employees. Because a key employee is so exceptional, it isn't easy to replace them after they are gone. More then half of small businesses stated in a survey that they relied on at least one or two key employees. One of the most important things you can do for the success of your business is to have an exceptional benefit program, so your company will not only attain key employees, but you'll have a better chance of keeping them.

2. Key Employee Insurance

Key employee or key man insurance is a life insurance policy for employees that help a business run efficiently. It is business insurance for your key employees. It protects an employer if a key employee becomes disabled or passes away. Since key employees may create high revenue for your business, then you experience a financial crisis if you should lose them. Business expenses may increase especially if you have to hire someone else. You lose regular customers, which can result in financial loss. Key employee insurance will keep your business running and protect you from financial loss. The financial stability of your company will be protected with key employee insurance. The family of a key employee that passes away can receive help from the cash death benefit. The death benefit is the amount confirmed in the policy contract that is payable upon the death of the insured. Key employee insurance can also give you security if you're in debt from loans with other companies. If your business should close, then your employees would have financial security, as well.

Sometimes, your key employees won't meet the requirements for key employee insurance. Insurance companies can refuse you coverage for your employee if they don't meet certain criteria. The premiums are based on the salary, age, height, weight, and health history of the employee. They will need a medical exam to determine their present health.

3. Amount Of Insurance Needed

An owner of a business can figure out how much coverage he or she needs with the help of a field representative. There are two main methods to determine how much coverage is needed. First, you should figure out the expense of finding, hiring, and training a new employee. Also, there are employment agency fees and the expense of a new employee moving to your company from another area. The sales volume that your employee is responsible for can also help you in evaluating how much insurance coverage you need. If he or she brings in more than 50% of the sales, then you're receiving a good profit because of them. You would take half the company's annual profits and multiply them by how long you would need to train someone that could do the job equally as well. The amount of coverage also depends on any existing debt or how much it would cost to find and train another employee. You should take into consideration how much income would be lost if you didn't have the sales from your key employee. Since every business is different, you should use evaluation methods according to your own individual circumstances.

4. Key Employee Insurance Costs

The costs of insurance will fluctuate according to the size of the policy. Business owners can inquire of different insurance companies about their rates. Key employee insurance can be expensive because it is specialized. Since your business pays the life insurance premiums, you will be named the beneficiary. It is suggested to buy 8-10 times the key employee's salary. If you can't afford to buy that much, then buy as much as you can afford. For a small business, you may need a payout of only two to three times your employee's salary. Choose a policy that you can afford. Employees don't pay for these policies. There is an insurance plan called the split dollar plan where the employer and employee share the premium payments. This is an advantage to you as a business owner because the costs are much less if they are divided between you and your employee. There are permanent key life insurance policies that build cash value over time. The insurance policy's face value is paid to your company if something happens to a key employee.

5. Term Life Insurance

One type of business insurance is term life insurance, which is usually a good starting place. It can be inexpensive, and it is a good plan to take out on all your key employees. It solves the immediate need and offers instant protection, while giving you time to look at more complicated planning options. However, you many want to choose the term life policy because of its affordability. Another reason you many want a term life policy is if your company's cash flow is low. There is a set duration limit on the coverage period with a term life policy. It's usually for a length of 5-20 years. If your business wants to be protected against the death of a key employee for only a short time, then term life insurance may be the appropriate choice. Term life insurance policies have adjustable premiums. They are never raised above the maximum premium affirmed in the policy. Some insurance agents may try to convince you that whole life insurance is better because you can borrow against the cash value of the policy. There is something called the surrender value that is supposed to give you cash back when you cancel the policy. The downside to this is you won't see any cash back at least until the twelfth year. In certain conditions, however, policies that build up cash value may be more appropriate.

Review the term life insurance height and weight chart. Even if you're a healthy person, if your weight is excessive, it will make it more difficult to buy term life insurance. The more you weigh, the higher your payments will be.

6. Split-Dollar Life Insurance

The split-dollar life insurance plan is a system of paying for insurance coverage. Premiums and benefits are split between employer and employee. This agreement is an excellent way to acquire and keep employees. It is an economical arrangement and gives some security to the employee.

Two main types of split-dollar life insurance policies are endorsement and collateral. With an endorsement split-dollar life insurance policy, the employer will purchase the policy that insures the life of employee. The employer will then pay a single premium at the beginning of the policy. There will be a separate agreement that splits the policy's benefits between employee and employer. The employer owns the policy, and the employee names the beneficiary.

With the collateral assignment method, the employee buys the life insurance directly and is the owner of the policy. The employer pays some or all the premiums after the employee makes a collateral assignment of the policy to them. The employee is repaid the premium payment of the cash value or death benefit. The endorsement and collateral assignment both may be an equity arrangement.

7. Non-Qualified Deferred Compensation

Non-qualified deferred compensation funded with life insurance is attractive to key employees and may keep them. Contracts are drawn up between employers and key employees to pay future payment for work that is being done now. Deferred compensation plans are intended to add to key employees' benefits under other qualified plans.

There are several types of non-qualified differed compensation plans. Preferred key employees have the opportunity to defer a part of their income within an agreed period of time with the basic deferral plan. The employee reduces current income tax liability by deferring compensation at the moment. This plan can be used with life insurance, which means it will grow tax-deferred. The employee will then get more supplemental benefit when they retire. Another plan is called bonus deferral match. Under this plan, the key employee volunteers to defer their bonus to a future time. The business will then match the deferral. They may match all the deferral, or just part of it. Current income tax liability will also be reduced with this plan.

Another plan called a nonqualified salary continuation plan is a strong business tool because it promises to pay the key employee a future benefit for retirement. They need to stay with the business until retirement at a certain age. This is very attractive to a key employee, and most don't want to leave a company that offers this type of plan. Through this type of plan, the employer purchases an insurance policy on the key employer and pays the annual premiums. The owner and beneficiary of the insurance would be the employer. The key employee receives the benefit at no cost. Another plus for the employee is that they only pay taxes on the benefits when they are paid out. If the employee dies, the employee will get the cost back from the tax-free insurance dollars.

8. Disability Coverage For Key Employees

Twenty million Americans suffer disabling injuries every year. Purchasing disability coverage for your key employees is another way to protect your business against financial loss. If your employee becomes disabled, you'll have added protection. Your business will be safeguarded against any revenue loss. The insurance carrier will evaluate the person you want to insure the same way as with key employee insurance. After the evaluation, they will set a premium on that person. Your company doesn't have to continue the salary since all benefits go to your employee. You should also inquire about disability coverage for yourself in case you become disabled for a while. This way you will still receive an income, and there will be money for someone to temporarily take your place.

The time between the disability and eligibility for benefits is called the elimination period. To replace an employee quickly, the key person policy has a short elimation period of approximately 90 days. You'll be paid up to 70 percent of the disabled employee's earned income if you have key employee disability income insurance. The funds from a disability income can help carry out a buy-sell agreement.

9. Buy-Sell Agreement

The buy-sell agreement is very important because it will take care of your business if you should die, become disabled, or retire. It controls who gets your share of the business. Problems with employers, creditors, suppliers, and your family will be resolved. Funds will be accessible to pay any obligations and ensure a reasonable or fair price for ownership interests.

A buy-sell agreement can involve one or more key employees. Key employment insurance and buy-sell agreements can help keep your business going. A market for the business is made if the buy-seller agreement is among your business partners or key employees. Buy-sell agreements can be funded with key employment insurance. This can be done with a cross-purchase agreement or a redemption agreement. With a cross-purchase agreement, all the owners will be in agreement about purchasing the interest of any owner who dies. Each business owner will buy a life insurance policy on the other owners. The worth of the business will be protected. In the redemption agreement, the life insurance policies of the owners are owned by the company. If an owner dies, the company buys back that owner's share.

The buy-sell agreement is a contract that can be made with all types of businesses. A life insurance agent, attorney, or accountant can help you come up with an agreement. It's important to carefully review a buy-sell agreement to make sure all the owner's needs are met.
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