Key Person Insurance as Part of a Risk Management Plan
Written by Mick Kelly
Within the tree care industry, every business has a few key players on their team that help the business succeed. What happens when one of those key team members moves onto another company or much, much worse, suffers a tragic accident and is no longer around? Protecting the business from losing a key person is a risk management must.
What is a key person?
A key person is an individual within an organization, whether an owner, partner or employee, who makes an essential contribution to a business.
What is a key person policy?
A key person policy is a life insurance policy paid for and owned by the business. The business is the beneficiary of the policy in the event of the death of the key person.
Who can be determined to be a key person?
Any employee can have a key person policy taken out on them so long as they are vital to your business operations and able to produce profits. Typically, the policies are taken out on owners and employees that the company would find difficult to operate without. In the tree care world, this may be the best climber in your company or your crane operator. It could also be your ISA certified arborist, your office manager, or the head of a division such as PHC or HR.
How much insurance coverage is needed?
The amount of coverage will vary from person to person and is dependent on their role within your company. You can figure out the exact amount of profit the company would lose without that person and multiply it by the time it could take to replace them. The cost of recruiting and training should also be taken into account. Keep in mind that the size of the policy will be restricted by the key person’s contribution to the company.
Can I only use it to replace a key person?
The money can be used to offset short term loss of revenue while a replacement is found. It can also be used to fund recruitment. In the current employment market, it may take months to replace a skilled climber or crane driver and it may take even longer to replace the skills of a company owner/founder or office manager.
The benefit may also be used to pay out the family of a partner in the business if there are multiple partners.
Types of key person policies
Like life insurance, key person policies can be term policies or whole life policies. Term policies run from 10 – 30 years and are the most cost-effective way to purchase key person insurance.
Whole life policies cover for the life of the insured. Whole life policies also have a Cash Value account associated with them and a portion of each payment is deposited there. The Cash Value can be counted as an asset of the company and can be used to secure loans or paid out if the policy is terminated.
Are there any tax implications?
Key person policies are paid using after tax dollars in most cases and the benefit is typically paid without income tax liability for the company. The exception to this is with C – corporations where the benefit will be included in your AMT calculation.
There are no tax implications for employees so long as the business owns the policy. If the policy is sold from the business to the employee, it may need to be declared as compensation and discussed with an accountant.
If you have an employee your business will struggle without or if your business will struggle without you – considering a key person policy is essential to the survival of your business.
For more information on key person policies, contact a member of the ArboRisk Insurance team! Eric, Tom or myself are happy to discuss these policies with you and answer any questions you may have. If you need additional help with any risk management concerns, check out our Thrive Risk Management Packages! These packages are available for purchase and can help take your business to new heights!