If you have employees, you know that the loss of a key player can have a profound impact on business operations.
When an employee leaves, customers who dealt directly with that person might worry about receiving their goods or services in a timely manner. Suppliers might be concerned about getting paid for their deliveries. And staff morale also can take a dip. That’s why it’s important to make sure that your business is prepared to deal with the unexpected departure of a key employee, which usually happens for one of three reasons: The employee chooses to resign, the employee becomes disabled, or he or she passes away.
While life insurance cannot protect against employees choosing to leave, it often is used as a tool to help incentivize them to stay. Deferred compensation arrangements allow you to provide retirement income to select employees. The way it works is that you and the selected employee enter a contract that specifies the compensation you will pay out to him or her in the future.
Since you might not set up a specific reserve fund in which a participant has a vested right, a life insurance policy is uniquely suited to informally finance a deferred compensation plan.
It’s also important to protect your business against the economic losses it might face as the result of a top employee’s death with the use of key person insurance. The business applies for and becomes the owner and beneficiary of a life insurance policy covering the key employee.
Deferred compensation and key employee insurance are benefits that are related exclusively to your top employees. These benefits can provide employees and their families peace of mind and added financial security, which can go a long way toward attracting and retaining them.
Claire Damgaard is an agent with New York Life Insurance Company in Dubuque.
