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Key Person Insurance
Termination and Retirement
Open communication and good human relations will go a long way to avoid a sudden departure brought about by various forms of resentment. An agreement between Mr Key and the employer as to the disposition of any insurance policies would be a good plan. This might allow Mr Key, on his departure or retirement, to assume the life insurance policy on his life and, if the insurance company permits, to convert the disability insurance to a personal plan. If term life insurance is used, there would be no significant residual value and, of course, there is none in the disability insurance.
Summary
The best strategy for managing key person relationships is to be not overly dependent upon that key person. Job descriptions and motivational training can reduce the risks of a sudden event causing disruption of the business. But there are insurance solutions for death and disability, which are affordable and should be considered.
If Mr Key is also a shareholder of the firm it is recommended the reader review the author's article Buy-Sell Agreements in order to become familiar with managing the issues of dissolving a business partnership or shareholder arrangement. We invite your call to discuss.
© Provided as a service to the clients and associates of
STEPHEN B H SMITH, CEB, CFP, PRP
YORKMINSTER INSURANCE BROKERS LIMITED
105 Dorset Street West,
Port Hope, Ontario, L1A 1G4
Tel: 905-885-4977 Tollfree: 1-800-668-1751
Fax: 905-885-2556 Mobile: 905-373-5670
sbhs@yorkminster.ca| www.yorkminster.ca
What is the problem?
The problem is, what happens to a business or its owners / partners / shareholders when a key employee can no longer do the job? Let's call the key employee "Mr Key"!
What are the issues?
A partnership, incorporated or otherwise, is like a marriage. There are four main areas of concern: death, disability, incompatibility, and retirement.
Death: If the Mr Key dies unexpectedly, how does the business manage until a new person can be found, trained, and trusted?
Disability: How does the business survive an indefinite period of disability of Mr Key? Maybe we don't know how long he will be disabled, when or if he will be returning to the job. A successor may be hard to find if the status is temporary.
Termination: Management will have difficulty if Mr Key is keen to leave! And Mr Key will not be at his best if he is aware the owners want him out!
Retirement: Normally this is an event planned some years ahead of time, but not necessarily! How do we prepare the business for Mr Key's departure?
These issues have, of course, personal implications for Mr Key and his family. Our purpose in this exercise is to deal with the implications for the business, and to trust that Mr Key has good advice and adequate resources to deal with his own personal financial planning issues.
Before getting into financial solutions, management would best be advised to prepare job descriptions for all key people in the firm. And to train stand-ins for the key people to cover such contingencies as short-term sickness, vacations, and other emergencies. If these stand-ins are sufficiently trained, perhaps they are the solutions to the problem and no third party financial solution is required. But then, of course, the newly-promoted stand-ins need themselves to train stand-ins! The next generation of Misters Key!
Disability
Disability insurance is available for key person coverage. The policy would be owned by the employer, on the life of Mr Key.
A typical policy works on the same definition basis as long term disability insurance. However it pays the employer firm a monthly benefit, typically for twelve months following the selected elimination period. And many will pay a replacement expense to cover a portion of the actual costs of finding a replacement key person, such as moving costs, interview costs, employment agency fees, etc.
Death
Life insurance for this purpose might best be term insurance, owned by the employer, on the life of Mr Key. Since the employer would not be concerned about a permanent policy, there would be no requirement for a term longer than the anticipated time between date of application and anticipated retirement date of Mr Key. On death, the policy proceeds would be paid to the employer to help defray costs of finding a successor.