Key Employee Life Insurance

"I'm not at all sure how the company would survive if we lost our top marketing person. "

The Scenario

Alex Martinez had always been interested in computer programming, but his father pushed him to go to law school. He earned his law degree, passed the bar, and took a job at a large law firm. But it was no surprise to anyone when, a couple years later, Alex created software called Boost Legal, designed to boost production by

tracking everything from billable hours to caseloads, legal research to trust accounts. His law firm became his first customer, and he soon left law to pursue the creation of similar software programs for hospitals, investment groups and insurance producers.

His company, Martinez Software Solutions, Inc., has

enjoyed great success over the last ten years, growing to 20 people and $15 million in sales the past year. Alex attributes much of this success to Angela Denning, a personable and enthusiastic salesperson who joined him very early on and is now responsible for nearly 70% of all annual sales. The strong relationships Angela has formed over the years are invaluable, and her depth of knowledge about the company, the products and the field in general is a tremendous asset.

On a recent morning, Alex heard on the news that an Angela Denning was listed as a fatality in a local car accident. He quickly determined that it was Angela Deming, not Angela Denning, but during those minutes of uncertainty, he truly feared for the fate of his company. He couldn’t imagine how he would find a replacement or how long it would take. Alex has been regularly setting money aside in a sinking fund to cover just such a loss, but this wake-up call forced him to acknowledge that he has not accumulated nearly enough to cover the company’s actual expenses if they lost Angela tomorrow.

CHARACTERS AND CONCERNS

Alex Martinez – Owner and

founder of Martinez Software

Solutions, Inc., a company that

specializes in creating software

to help large businesses boost

production by streamlining

administrative tasks. To protect

the company, Alex has set up

a sinking fund, but hasn’t had

enough time yet to accumulate

sufficient cash to fully cover the

loss of a key employee.

Angela Denning – The leading

salesperson at Martinez Software

Solutions, Inc., Angela is 50 years

old and in good health. She has

been with the company almost as

long as Alex and is responsible

for 70% of company sales. She is

also the company’s highest-paid

employee.

A Planning Strategy

Marco Bertolli, Alex’s insurance agent, is pleased when Alex meets with him to discuss his situation. Marco has urged Alex to better protect the company. He fully agrees with Alex’s assessment of the potential loss of productivity and profits in Angela’s absence, whether Angela took another job, retired or died. In fact, he believes it’s quite possible that such a loss would affect customers (who might be reluctant to place orders if

the company appears on shaky ground) along with

banks and vendors (who might hold back until they’re sure the company can withstand the loss).

As a first step in increasing overall business protection, Alex decides to purchase key employee life insurance on Angela’s life, with a face amount that approximates the estimated cost of finding, hiring and training a replacement. Alex notifies Angela of his intention and secures her written consent. The company will own the policy, pay the premiums, and be the beneficiary. If Angela dies, the company will receive the death benefits tax free (because the company met the notice and consent requirements), and can use that influx of cash to keep the company stable while getting a new

salesperson in place.

Luckily, Alex realized in time that his sinking fund would not be sufficient. Companies typically use life insurance to cover losses incurred as a result of the death of a key employee because it provides the necessary amount of money at the precise time the business needs it. While a business could choose to use term insurance, Alex opts for whole life, since he will then have access to the policy’s cash value if he needs it for emergencies (although he understands that loans or withdrawals would necessarily reduce the policy’s death benefit).

MORAL OF THE STORY

For business owners, key

employee life insurance is a

protection strategy that is both

simple and compelling. It provides

the necessary amount of cash

just when it’s needed to see the

business through a time of loss

and to hire a replacement and get

the new person up to speed.