In today's complex business world, companies strive for the right mix of people and technology in order to compete. However, it is the ability of people to use technology profitably that in all likelihood determines how successful the enterprise will be. Consequently, the sudden death of a key employee may not only impact your company's ability to use its technology, but may also affect the important business relationships that have been built and nurtured over time. The end result can often be devastating for the future of the business.
Businesses can protect against sudden loss with a life insurance policy on certain key people.
Key person insurance indemnifies a business for the loss of a valuable team member's skill and experience. Generally, the company owns the policy, the premiums are not deductible, and the death proceeds are received income tax-free by the company. This method's popularity may be nothing more than the 'default' approach, in that it may reflect the difficulty business owners have in quantifying a key employee's value. A more sophisticated method is the business profits approach which is similar to the needs-based approach used for determining family life insurance needs. This method tries to quantify the portion of the business's net profit that is directly attributable to the efforts of the key person, and multiplies that amount by the number of years estimated for a replacement to become as productive as the person insured.