By: Arthur L. Bernstein and Keith Sonderling
Everyone knows how difficult it is to find trustworthy employees who can effectively and efficiently run your business. Whether it be the CEO, the top salesperson, or the experienced company veteran, all businesses generally rely on a few in dispensable employees. Although these employees’ significance is recognized, most businesses do not have a contingency plan in the event of an unexpected death of certain key employees. With the loss of a top executive or other seemingly irreplaceable talent, some companies revenues would immediately decrease or close down their doors. Fortunately, companies have the ability to avert this risk by purchasing “key person insurance” to avoid financial loss in the absence of a critical employee.
Key person insurance is simply a life insurance policy on certain “key” employees. A “key” employee is generally an employee whose unexpected causes severe operational disruption or significant financial harm. As each company’s key employee is different, it is incumbent on the company to properly identify the employee or position whose sudden and permanent absence would cause the most significant harm.
In the event of the loss of a key person, the policy would generally offset the costs of obtaining temporary help and recruiting a successor employee or minimal delay in an ongoing project. The company owns the policy and the proceeds are paid directly to the business. It’s important to set up the life Insurance Policy properly to avoid unnecessary taxation.
Like other life insurance policies, key person insurance requires an application and a screening completed by both the company and the employee. Accordingly, full cooperation from the employee is imperative to obtaining this insurance. Therefore, employers are encouraged to make employees aware that the company has the right to obtain this policy and that full cooperation in obtaining the policy is required. Employment contracts should specifically address the employee’s required cooperation. To avoid all doubt, an employment contract should, among other things: disclaim the employees right as a beneficiary to this policy; require cooperation and assistance with the company in applying for, obtaining and maintaining this insurance; and give advance consent to the insurer if physical examination or the disclosure of medical records are required to obtain this insurance.
Key person insurance is an easy mechanism to protect your company’s greatest assets – its essential employees. Obtaining this insurance for your business can give you peace of mind that if something would happen to your key employees, business operations will continue, profit losses will be supplemented, and resources will be available to recruit, hire, and train a replacement.
If you would like to know how Key Person insurance can benefit your company contact us for a confidential consultation at 561.689.1000, e-mail us at rsba@rbernstein.com, or visit our website at www.rbernstein.com.
Keith Sonderling is an attorney with Gunster Law Firm in West Palm Beach. Keith represents and defends corporate clients in labor and employment litigation disputes. Additionally, Keith provides daily counseling to clients facing employment related issues. Keith is AV rated by Martindale-Hubbell and is recognized by Super Lawyers as a Rising Star and Florida Trend Legal Elite as an Up and Comer.
Arthur L. Bernstein is instrumental in new group/employee benefits development and individual life insurance planning at Richard S. Bernstein & Associates, Inc. He assists corporations to expand their current revenues while creatively exploring additional methods to reduce insurance costs. Arthur is a graduate of the University of Miami having earned his Bachelor of Arts in Motion Picture and Theatre Production with a minor in Marketing. He is currently Executive Producer/Writer for “Walt Before Mickey” which is scheduled to premiere in 2015. Email him at Arthur@rbernstein.com.
