Key Person Insurance: How to Recruit, Retain and Reward Great Talent
Business and risk go hand in hand. However, some risks you budget for, and others you insure against. Knowing the difference is essential.
What assets of the business are subject to damage or loss? The building? The equipment?
These are usually insured for replacement value.
But what about the most valuable assets of the business: the knowledgeable and skilled people who make up the company, especially those we consider key people?
This may be an owner with specialized skills, but often it could also be an employee instrumental in the success of the business. It could be a star salesperson, a marketing genius, an IT wiz or the head engineer. The test is that it would be difficult to imagine the business running smoothly without them.
How do business owners attract, retain and reward such key people?
Besides being offered a good pay package, today’s employees are looking for vision, value, passion and purpose. They are also looking for a robust benefits package. Beyond the traditional health and dental coverage, these key people often need some customized benefits. Providing a special class of benefits under the group plan and offering higher amounts under the Health Spending Account present a good start. You could also provide access to superior private disability contracts at discounted rates.
We have so far only addressed ways to attract and retain these individuals. What about the risk to the business if this key person is disabled or dies prematurely? How do you insulate your operation against the sudden loss of your key performer?
The company may want to hold a life insurance policy on the key person’s life for an amount to hire a replacement and offset any losses during the transition period. This may be a multiple of salary payable to the company. While the premium is not a deductible expense, any benefit received would be tax free to the company.
To protect against health events, the business can buy a critical illness contract that would pay a lump sum in the event the key person is diagnosed with one of the 25 covered conditions. The big three being heart attack, stroke and cancer. This should be for an amount equal to at least one year of income to hire a replacement while the key person recovers.
There are many ways of structuring these products where there could be some refund of premiums at a future date. It is essential to work with a qualified insurance expert to implement any of these strategies. Besides selecting the right type of coverage, make sure to structure the ownership and beneficiaries correctly.
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Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The views are those of the author, Marnoa Private Wealth, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.
