Key Employee Insurance Protects The Future Of Your Business

You have got a great group of employees working out with you and your business is prospering. You know much of that success is due to one or two vital individuals with both skills and personalities that would be difficult to replace. Imagine they were injured and out of work for a while, or even worse, suppose they died unexpectedly? Would your business survive? 

There are five individual groups that will be most concerned about the immediate financial health and future of the business in the event of the death or disability of an owner or key employee: 

• Employees will be concerned about the durability of the business and their job security. 
• Creditors will be worried about the effect of the key employee’s death on the earning power of the business and its future capability to pay back any outstanding debts. 
• Suppliers will wonder about the implicit loss of a customer. 
• Customers will be concerned about the ability of the business to continue providing its products and services, and will consider looking apart to satisfy their requirements. 
• Tax collectors will be concerned, but only to the extent that there are sufficient funds to pay the necessary taxes, even if it means the ultimate sacrifice of the business. 

Key employee life and disability insurance policies can help soften the impact of all of these eventualities. 

Key Employee Life Insurance 

Generally, your business purchases a life insurance policy on a key employee, pays the premiums and is the beneficiary in the event of the employee’s death. As the owner of the policy, the business may surrender it, borrow against it and use either the cash value or death benefits as the business sees fit. 

However, coming up with a dollar value on a key employee’s economic worth can be challenging. There are no specific rules or formulas to follow, but there are several guidelines that can help. The appropriate level of coverage might be the cost of recruiting and training an acceptable replacement. On the other hand, the insurance amount might be the key employee’s annual salary times the number of years a newly hired replacement might take to reach a similar skill level. Finally, you might consider the key employee’s value in terms of company profits. The level of insurance coverage might also be tied to any anticipated profit or loss. 

Premiums for key employee life insurance are not a tax deductible business expense for federal income tax purposes, since your business is the recipient of the benefits. For the most part, the death benefits your company receives as the beneficiary of the policy are not considered taxable income. However, if your business is a C corporation, the death benefits may increase the corporation’s liability for the alternative minimum tax. You should consult a tax professional for information on your specific circumstances. 

Key Employee Disability Insurance 

The death of a key employee is not the only threat to your business. What if a key employee is injured or becomes ill and is out of work for a long-term period of time? Disability insurance on such a key employee is another way you can protect your business against any resultant financial loss. 

A crucial part of key employee disability insurance policies is the definition of disability. Generally, these policies define disability as the inability of the employee to perform his or her normal job duties due to injury or illness. As with life insurance, your business buys a disability insurance policy on the employee, pays the premiums, and is named as the beneficiary.However, the insurance coverage pays monthly disability benefits to your business, If the employee becomes disabled. These benefits can equal a certain percentage of the key employee’s monthly salary, up to either a maximum monthly limit or 100 percent of their salary. The benefits may be used to pay the operating charges of the business and to cover the expense of finding a temporary or permanent replacement for the key employee. 

The disability programs generally offer elimination periods( i.e. the waiting period between the disability and when the benefits begin) ranging from 30 to 365 days. Depending on the policy, your business may receive benefits for 6 to 18 months, which would be long enough to allow the crucial employee to return to work or for the company to replace the key employee. 

Depending on the type of coverage purchased, the premiums you pay for the key employee disability policy may or may not be a tax- deductible business expense.However, also the premiums are a deductible expense, If the policy is considered business overhead expense insurance. While the business would be responsible for paying taxes on any disability benefits received, the business expenses the policy indirectly pays for would result in an offsetting deduction. 

Planning ahead can help secure your company’s financial future by preventing a business from having to liquidate to raise cash. Key employee insurance can help assure families, employees, creditors, suppliers and customers that the future of the business is secure. By taking life and disability insurance on the owner( s) and key employees, the business is allowing everyone to know the financial condition of the business will remain sound despite the loss of a key person. 

For more information, feel free to Contact Neptune Financial to schedule an appointment. Get Free Life Insurance Quote 

Basic Understanding 

This blog is being provided for informational or educational purposes only. It doesn't take into an investment objects or financial situation of any individual, family, prospect, client, or prospective clients. The information isn't written or aimed as investment advice and isn't a recommendation about managing or investing your retirement savings. 

An individual seeking information regarding their investment or retirement needs should contact a financial professional. 

Neptune Financial, and their financial professionals don't render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns. 

Resourse- https://www.neptunefinserve.com/2019/11/15/key-employee-insurance-protects-the-future-of-your-business/