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owners accept without question the wisdom of insuring the firm
against the loss of its property values. We take care to
insure the physical assets against fire, tornados and other
disasters. Yet, protection from the loss a key executive may
be far more important.
First, the probability of losing a
key employee is far greater than a fire loss. It has been
estimated that the chances of death of a key executive is 14 times
greater at age 45 than a loss due to fire. It increases to
17 times at age 50, and to 23 times at age 55. Further,
about one out of every three individuals dies in the working
period of life with a consequent loss to his/her business.
Second, the loss due to a fire is
temporary. Plants and factories can be rebuilt. Inventory
can be replaced. The new building is likely to be more
useful and valuable than the old. On the other hand, a new
hire may need several months or even years to become as productive
as her/his predecessor. The deceased employee may be impossible to
replace.
Who Is Key
Every corporation has at least one
key executive or an employee who makes a substantial contribution
to the operation, profitability and success of the business.
Any individual that has critical intellectual information, sales
relationships, bank relationships, product knowledge, and/or
industry contacts that may adversely affect profits in the event
of their absence, may be considered key.
Life Insurance
Although life insurance cannot ever
fully replace the value of a key employee, it can indemnify the
business for the financial setbacks that can occur. Life
insurance can provide the business with needed funds to keep the
business running, to assure creditors that their loans will be
repaid, to assure customers that business will continue
operations, to cover the special expenses of finding, hiring, and
training a replacement.
How It Works
There is no particular form of
agreement or special contract needed by the business to obtain key
employee insurance on an executive or owner. However, the
board of directors should authorize the maintenance and payment of
the policy.
The applicant is the
business. The application is signed by an officer of the
business other than the insured. Generally, the premiums
will be paid by the business on an after-tax basis and are not
deductible as a business expense. The business will be
designated as the beneficiary and the insurance proceeds received
upon the death of a key executive are not subject to federal
income tax.
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