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Key-Person life insurance safeguards your business

Add another layer of protection to your business during the global pandemic

For years now, human resources departments maintain specific travel policies that restrict the number of company executives engaged in business travel at any given time in order to protect the company should the unimaginable happen: loss of life in the event of a transportation accident. The sudden loss of key personnel is a tragedy that also can leave businesses is a state of disarray if they didn’t have several layers of contingency plans in place. This is just one smart business strategy to protect the future of your company.

Could your company survive a COVID-19 loss of an executive?

The emergence of the novel coronavirus, COVID-19 adds yet another threat to our way of life and how we conduct business during this global pandemic. Just as COVID-19 has taken the lives of our elders, often with pre-existing health conditions, it’s also taken the lives of seemingly healthy individuals. And we’ve learned that some of those that have managed to recover are left with serious and potentially life-long organ damage and other debilitating conditions. For most of us, we won’t really know if we can survive the disease especially since we are all at risk of getting COVID-19 if exposed. With all that said, could your business survive if COVID-19 affects one of your key personnel?

One would be hard-pressed to find a company that didn’t rely on key person(s) that are the driving force behind the business’s continued growth and success. The definition of a key person is “an Individual whose knowledge, creativity, inspiration, reputation, and/or skills are critical to the viability or growth of an organization, and whose loss may cripple it.”

The key person may be a partner, majority stockholder or an individual with expertise that is unmatched throughout the rest of the company. If this person’s exit from the company is planned, such as retirement or voluntary termination, then you can prepare for the loss and take the necessary precautions to minimize the impact. However, if the departure is unplanned due to a COVID-19 death/ permanent disability, accident or quitting on the spot, then the company is exposed to financial risks.

Offset the risk with key-person life insurance

If your organization employs individuals who are vital to its success, a key-person life insurance policy will offset your risk. This insurance solution can protect your organization’s solvency, along with the investments made by lenders and investors to the company, in the event that you lose the key person or people without warning.

Before purchasing key-person life Insurance, consider estimating the value of your key employees. Think about the projects that would be lost without these people, the amount of sales generated by these people, and costs associated with replacing them. Now consider the advantages of putting a key-person life insurance policy in place:

Advantages of key person life Insurance

  • Can be easily implemented and does not require Canada Revenue Agency (CRA) approval; only requires an annual report to the CRA.
  • Life insurance benefits are paid to the company tax-free.
  • Customers, creditors, lenders and stockholders have the assurance that the business has a continuation plan and coverage in place.
  • There is flexibility in what the funds can be used for.

A key person life insurance policy ensures future stability for established businesses. For up and coming organizations seeking initial or next-level funding through various lenders or venture capitalists, a Key Person Life Insurance Policy most likely will be a requirement to secure those investment dollars.

How does key person life insurance work?

  • Employer purchases life insurance on the key individual(s).
  • Employer is the beneficiary of the life insurance policy and applies for and owns the policy. If the key employee dies prematurely, the policy pays out to the employer.
  • Tax-free dollars from the policy can be put toward finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.
  • Policy can be transferred to a departing key employee as a retirement benefit or to a different key individual, upon the retirement of the original key employee.
  • It can be used to buy out the key employee’s shares or interest in the company.
  • Premiums are based on several factors, including the key employee’s age, physical conditions and health history. The amount of coverage also affects the premium.

The life of a key person and their value as a company asset is a delicate topic for any conference room meeting, but it’s a critical discussion that needs to happen inside every organization. The kind of uncertainty that COVID-19 ushered in should spur organizations to consider different ways to protect both the longevity and survival of their business.

“If your business success is dependant on specific people’s talents and skills – you need to protect them to protect your business!!”

Mark Smigel, CFP, EPC | Life and Benefits Manager
Reliance Insurance Agencies Ltd.

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