Insure Your Key Employees

The unexpected death of any employee can significantly affect company morale and productivity. But the unexpected death of a key employee can cause disruptions with far broader impact. At the least, profitability probably will be reduced over the short term. At its most severe, the loss of a vital employee can even jeopardize a company's survival. While many business owners and managers would like to believe they can replace any employee, the truth is that some employees are more valuable to a company than others.

If a builder/owner (or senior management in the case of a larger company) deems someone a key employee whose loss would have a significantly detrimental impact on the company, that employee's life can and should be insured.

Significant issues to be addressed when an owner considers key employee life insurance: whether the employee is insurable (certain health issues might preclude coverage or make premiums prohibitively expensive), the annual premium and the size of the policy. The company pays the premiums and would be the beneficiary of the policy should the employee die.

Key employee life insurance is underutilized in the home building industry because builders probably see it as just another expense. In an industry in which employee turnover is a given, owners might not fully appreciate the value of long-term employees who have committed to a career with the company. And they especially might not realize how much money critical employees are worth to the business. (Key employee life insurance also can be used in closely held companies to provide liquidity upon the owner's death, but this type of strategy is best utilized in consultation with an owner's financial advisers.)

When calculating the potential costs of losing a key employee, builders should attempt to quantify lost productivity, employee search expenses, new employee training costs and lost profit. As premiums are not deductible as a business expense, company owners should carefully consider the cost of the insurance versus its benefits for them and their company. (While premiums for policies whereby a corporation is the owner and beneficiary are not deductible for federal income tax purposes, neither are the death benefits taxable when paid. An exception to the latter is when a corporation is exposed to the alternative minimum tax.) The purpose of this type of insurance policy is to ensure the company's survival, not enhance its profits.

Other than the obvious expense for the insurance premium, company owners also should investigate whether premiums for key employee insurance will create or compound an accumulated earnings problem. Confirming this issue as well as premium deductibility probably can be resolved through a quick phone call with the company accountant.

Finally, owners should not confuse key employee insurance with another employee benefit called split dollar insurance. Split dollar insurance typically is designed to provide company executives with life insurance benefits at low cost. (In turn, the premiums paid by the employer are secured; they are recovered when the executive dies.) But there are tax disadvantages to this type of insurance, making it unattractive for use in most small and midsize construction companies.