What is your human capital worth?
As a business owner, you understand that you need working capital to keep your business going: operating expenses, inventory, salaries, etc. But who in your business handles the growth and success? In other words, what is your Human Capital worth, and did you know it could affect your bottom line?
As companies grow and become more established, owners must recognize that their key people are paramount to the success of the company. Losing a key person could have a negative financial impact on your business.
A key person is anyone that is vital to the success and profitability of the business. They could be people with expertise in technology or design that cannot be easily and quickly replaced. These key people could be top sales people who have developed relationships with customers, exceeded their sales goals, and have a wealth of experience. They could be someone whose death could have a negative financial impact on business credit. They could be a partner. What is the contingency plan if that person dies? Key person life insurance is a cost-effective way to reduce the risk associated with the death or disability of a key person.
Besides death or disability, what if that talented key employee wants to leave the company for a major competitor? Key person life insurance could also be a tool to reward and keep those important to the success of the business. As the business grows and profitability increases, employees expect business owners to adequately compensate and reward them for a job well done. Key people life insurance, when structured correctly, can be an attractive alternative to provide an executive benefit and tie them to the business.
What type of life insurance can business owners use for this planning technique? The business will buy key person life insurance on one or more key people. The business is the premium payor, the owner and the beneficiary. The policy is usually either a term life insurance policy or a permanent policy that builds cash value over time. Profitable companies may choose a permanent policy since the cash value build up is an asset on the balance sheet. The cash value grows tax-sheltered and may be accessed tax-free.
Business owners considering key person life insurance for their loyal and talented key people should work with a trusted insurance agent. Ideally, this agent will have experience with business life insurance. This agent can take you through the process of securing the insurance. There are several questions that the owner must address in order for the agent to design the proper key person program to deliver on the owner’s goals and objectives.
There are four points to consider when exploring key person life insurance for a business:
It creates an immediate amount of replacement capital should a key person die;
It creates a reserve of capital to provide retirement benefits for loyal key people;
It creates a fund to be used to continue a key person’s income during a period of disability;
It creates a reserve of capital to provide for emergencies or opportunities.
As a business owner, your largest asset may be your business. It may be also be your greatest risk. Protecting this asset should be at the top of your list. Consider your human capital and the impact a death or disability of key people would have on your business. Ask a trusted life insurance agent if key person life insurance might be a solution for protection, as well as a way to reward and retain these important people. Your business and the people who help make it successful are certainly worth it!