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Insuring Your Key People

     According to the Bureau of Labor Statistics, the unemployment number in June was 7.6 percent. But, according to a story in Forbes magazine in July, that number is hogwash.

     The Forbes story begins with an older man identified as G. who is unemployed. In the story, he is described as “tall, erudite and having training in a specialized field.” He lost his job when the Great Recession hit and has taken a few part-time positions that provided ever diminishing salary and responsibility. He has tried, continually, to find work, even calling friends from childhood in hopes of scaring up a warm lead, with no luck.

     The story continues, "But the ‘official’ unemployment rate doesn’t count men and women like G. — discouraged workers who have settled for part-time jobs, or have given up looking altogether. Tracking those individuals, under what’s called the "U-6" rate, gives a very different measure of the nation’s unemployment rate:14.3 percent."

     One would think that in this time of high unemployment it is easy to find employees, but my son Dylan says otherwise.  He is the proprietor of Great White Mechanical, a heating and cooling company located in Saddle Brook. He recently answered when asked about his business, “There is a lot of work around, especially at the shore because of hurricane Sandy, but it’s tough to find good employees.”

     Go figure.

     This column is about ensuring and insuring employees.

     Question number one: What would happen to your business if one of your key employees died? Take a minute to wrap your mind around that one. You insure other assets of your business--vehicles, equipment, buildings, etc. So why not insure what’s really valuable -- people?

     What are your employees worth? It’s a lot more than their salaries. What comes to mind is performance, professionalism and character. If you lose a key person such as an executive, manager or salesperson who has set up some core relationships for your business, you're looking at a big hit.

     Without insurance, if you suffer a loss, think of the decrease in revenue that you will have.  Is that a good time to bear the cost of recruiting and training a replacement? And what if that new person doesn’t work out? Think of what your client/customer attrition will be.

     Don’t ever forget you are not the only one in the business.

     All right, I’m a believer, what will it cost? It depends. It depends on the amount of coverage, the types of coverage, the nature of your business, as well as the medical histories and ages of the insured parties.  And lastly, the estimated expenses and profit/loss that could occur as a result of their death or disability.

     Besides giving you a clearer head, key person insurance may be important to your lenders, creditors and vendors should one of your key people die. If you are a corporation, insurance can comfort investors and shareholders.

     If you purchase a cash value policy, e.g., whole life, universal life or variable life, you can offer a nice retirement perk to your key employee(s). These types of insurance policies provide a buildup of value over time, and, if the policy has not been used, or values have not been borrowed, the cash value of the policy can go to the employee at his/her retirement date.

     Now, for the tax angles.  Premiums on the policy are not tax-deductible to the company because the company is the owner and the beneficiary. But that’s okay because the premiums are chicken feed compared to the death benefit. The death benefit will be received without any taxes. The employee will not pay any tax on the premiums unless they have an ownership stake in the policy.

     What if the insured key employee is also a majority shareholder in a corporation? The good news is: If the proceeds from a key employee life insurance policy are made payable to the corporation, those proceeds will not be included in his or her gross estate for federal tax purposes.

     One of the key elements of running a business is insuring risk. If you lose one of your key employees, you are at risk. You might want to look into some life insurance ideas to reduce that risk.  

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.

The content was featured in Randy's column in The Ridgewood News on August 9, 2013. Click here:  Neumann: Insuring your key people 



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