Key Personnel Benefits Beyond 401(k) Plans

Posted on September 20, 2011 by Bill Faiferlick

An issue which tends to garner little attention is the issue of key personnel benefits which can be extremely important to smaller to medium size businesses as they compete with larger organizations for much sought after employees.

While this segment of employees will always have as part of their retention package 401(k)s, vacation leave, sick leave, or even bonuses what is overlooked and underappreciated until a life threatening event occurs (which none of us can begin to predict) is how the company is adequately protecting itself (providing the company is planning on remaining in existence) from one generation to the next.

Public corporations long ago solved the dilemma of recouping year’s worth of expensive bonuses and other programs by converting the long term outlay to a zero net cost utilizing an extremely simple but very effective key person life insurance program.

The inception of key person insurance (whose origins date back more than seventy years) is a mainstay program in corporate America. Yet mid-to-small businesses routinely fail to plan for the future by insuring one of their most precious commodities: the key employee.

The advantages of key person insurance is obvious; a key person passes away and a very large tax free check is written to the company which more than reimburses the company for not only all of this individual person’s benefits, but it usually provides enough tax free capital that if invested properly can support many key person programs for years into the future.

For any medium-to-small employer, having this type of capital infusion when they least expect it immediately reduces internal costs allowing them in turn to remain more competitive than their counterparts. It also eliminates the possibility of being forced to cut back on benefits and risk loosing key employees at a very inopportune time to larger companies.

So far I’ve focused on the benefit to the company and the benefit to the owners. When a company initially hires younger key employees who may not be married or have other financial commitments as the company grows their employees are aging. They could, if an unexpected death were to occur, make part or all of the benefit available to the employee’s survivors. It is this type of goodwill everyone within the company will learn of which separates average companies from truly great companies whose employees choose to stay with them for years if not decades. It is in this lack of turnover which benefits the company the greatest. Having employment continuity should never be overlooked as the expertise an employee develops within the company reduces costly mistakes. Developing longer term employment relationships fosters longer term vision which many companies fail to benefit from. American companies tend to possess short term visions, while many other countries take the longer view approach and in so doing fail to experience many of the same difficulties U.S. companies face.

The quickest way to recoup this extraordinary benefit in a young growing organization is to insure the oldest segment or employee. For only two things are certain: death and taxes. By insuring the older employee and keeping the policy in force long after the employee has retired, the company is absolutely guaranteed to be rewarded.

For any growing company which may choose to sell and not stay in the family business beyond one or two generations, if the company can show they have key personnel policies in place, this increases the value of the organization in the case of a sale or merger as all policies will eventually pay off. Additionally, some owners will choose to take the policies with them instead of selling them with the business and individually collect the death benefits since all death benefits come to the owner as tax free income.

There simply is no better leverage to pay premiums over time and receive hundreds of thousands of dollars in return, the ultimate leverage strategy!