Your Insurance Matters: Key Person Insurance
Your Insurance Matters
by Shirley R. Lamdan, CLU, Hagerstown, MD
Key person insurance permits business and professional organizations to plan for the risk of death or disability of their key people. What would happen to the organization if a key person were unable to return to work? What percentage of revenue is due to the key person? Would the key person's absence result in the loss of clients? Would the organization continue to function as usual? Would productivity suffer? Would creditors become nervous and hesitate to continue lending? How long would it take for an appropriate replacement to be identified? What costs would be involved in hiring and/or training the new employee?
For every organization, the individuals who are absolutely critical to the success and profitability of the organization can be considered key persons. They may be owners, non-owners, partners, executives, sales professionals, and research specialists. What sets them apart is that they make a significant contribution to earnings and possess capabilities vital to the organization.
Where an organization depends upon a few key people for its continued profitability, the death or disability of just one of them could result in the firm's collapse.
A key person's disabling injury created a huge crisis for a once-thriving Pennsylvania business. The largest clients took their needs elsewhere. Sufficient funds were unavailable to cover expenses during the long and very difficult transition. Eventually, the firm collapsed and employees found themselves scrambling to find new jobs.
A Maryland medical practice lost its founding member to an unexpected death. This professional also capably managed the business side of the organization. Fortunately, key person insurance coverage had been put in place. The insurance proceeds paid salary continuation for the surviving spouse, covered expenses during the transition period, helped stabilize the organization's credit position, and helped purchase the business interest from the deceased owner's estate.
From these two examples, it becomes clear how key person insurance coverage can serve multiple functions: securing loans for the organization's growth, strengthening credit, paying for the recruitment and training of a replacement key employee, paying expenses during the transition period so the organization can be stabilized, buying the business interest from the disabled key person or the deceased's estate, paying salary continuation for a surviving spouse or for the disabled key person, funding an executive compensation arrangement.
Vitally important is the careful selection of an experienced and independent insurance professional. The insurance professional will help determine the appropriate insurance amount and will identify the most cost-effective insurance products from the best insurers. The experienced independent insurance professional will also be thoroughly informed about relevant regulations and will collaborate closely with the organization's tax advisers.
Since 1982, Shirley R. Lamdan, CLU of Hagerstown, MD has been serving individuals, corporations, and nonprofits with independent retirement and insurance services. She can be contacted at 301-791-9427 and firstname.lastname@example.org.