Insuring longevity Benefits of key person life insurance

By Paul C. MacDonald

qEVERAL years ago. I worked for \Ja manufacturins firm where several key executives riere returning from a trip when the small plane they flying in crashed into the moun and all were killed.

The family-owned company left with one brother to run the company and several widows as shareholders. The sudden, simultaneous deaths of several key managers put a tremendous amount of financial and emotional pressure on the one surviving brother, and soon thereafter, he had a heart attack and died. The company was eventually sold to an outsider for pennies on the dollar. This is not an uncommon story.

In a short span of time, the manufacturer was reduced from a highly profitable company to one that nearly went out of business. Whv did this happen?

Mostcompanies

realize that their key people have a tremendous impact on the profitability of their business.

One reason was undoubtedly a lack of top management talent. A good manager is hard to find, and small businesses have trouble keeping more than one or two because the company isn't large enough to offer enough room for more to grow.

A second reason may have been a tightening of credit. Banks don't like risk. They like to see a strong balance sheet, a strong income statement, a well thought out business plan, a his- tory of good execution, and stability among the managers who previously achieved success.

Another reason may have been that the new leadership wasn't able to lead the employees as well as the recently departed managers did. People can be in shock for a long time, and much of their creativity and energy can be lost while they grieve. There is also a tendency to canonize a good person who died too soon, making it more difficult for successors to bejudged fairly.

I don't know why the company struggled, but I do know that a key person life insurance policy would have helped. Most companies recognize that their key people have a tremendous impact on the profitability of their business. A president, a top salesperson, or a financial officer can be difficult to replace. Their sudden loss can be devastating.

However, if the company had purchased a key person life insurance policy, it would have received cash at a time when it needed it most. Companies can have lines of credit frozen, or even called at the death of a key executive, so a sudden influx of tax-free money certainly helps.

Who should a company insure and how much insurance should they purchase? What type of insurance should be bought? lnsure any execulive you absolutely cannot afford to lose. Given enough time, almost anybody can be replaced, but if death were sudden and unexpected, what impact would that have? Think about what the loss of a key financial officer or alesman could mean to your busiss. If you couldn't replace your key executives tomorrow, then you probablv need to insure them.

As for the amount of coverage a company needs, there is no right or wrong answer. I generally recommend purchasing the maximum coverage that can be obtained. An insurance company will typically offer l0 to 20 times an executive's salary as coverage.

As for what type of insurance should be purchased, the answer varies. If the company is younger and cash is tight. term insurance is very inexpensive initially. If the company has good cash flow and is more mature. then a permanent insurance plan with a high early cash value can be utilized. This can serve to provide a "golden handcuff'to keep the key execulive from leaving to a competitor and then coming back and raiding key management. It also has minimal impact on the company's balance sheet.

For those who own or manage a business. make sure to protect it. Remember, the rank and file employees are counting on you for ajob, and your families are counting on the income you derive from the business.

- Paul C. MacDonald is a chartered life underwriter and .financial consultant specializing in working with businesses in the areas ofinsurance, beneJits, estate and retirement planning. A qualifying member of the Million Dollar Round Table, putting him in the top 6Vo of insurance professionals worldwide, he may be reached at (949) 2s2-26s2.