Protect your business against the death and / or disability of a valuable key employee.
Typical Group Life and Disability insurance offered to employees usually only cover a fraction of a key executive’s high income. Q.S.R. Insurance Agency, Inc. can customize a benefit package to wrap around the group plan for each of your key people, ensuring they and their family members are adequately protected in the event of an untimely death, accident or illness. Providing your executives with key person insurance creates a safety net for your business as well.
Statistically, key personnel who generate a substantial amount of income for the business, and other types of important key employees who suffer an illness or injury can lead to:
- Interruption or loss of existing and potential product sales.
- Loss of confidence from existing or new suppliers.
- Loss of competitive edge afforded by innovation or design expertise.
- Special projects delayed or not completed.
- Additional strain on remaining staff who have to cover for the missing key person.
- Lowering of staff moral.
- Large recruitment costs and head hunting fees to find a replacement.
All these factors make it imperative that well run businesses insure their key staff, as well as their other assets.
Click the toggles below for details on types of Key-Person Insurance.
Key Person Life Insurance protects your business if one of the main partners passes away unexpectedly, and helps to minimize financial loss. Your business is typically responsible for the premiums, as it is also the beneficiary. The value of your business (as established through financial records) will help to determine the benefit level and premium amounts.
A Business Overhead Disability policy prevents businesses from going under from regular overhead expenses while the business owner is unable to work and run the business due to disability. These types of policies will typically pay for things like employee salaries, rent and utilities, among other expenses.
Good fences make good neighbors, and a road map for unwinding jointly owned ventures and for otherwise dealing with foreseeable contingencies — death, disability, retirement — is essential to the most modest of business undertakings. The issue is neither the dollar volume of the business, nor its value nor the number of its employees. The issue, rather, is the importance of the business to the financial stability of its owners. All business owners die. Many, indeed, a substantial minority, quarrel with their partners, and need a set of rules for resolving disputes and, if necessary, for ending the relationship.
Having said how important buy-sell agreements are to any business with more than one owner, the frustrating truth is that there are no well-drafted buy-sell agreements. Buy-sell agreements address problems for which there are no fair, all-purpose solutions. For example, in providing for the estate of a deceased owner to sell the interest to the surviving owner at fair market value, how is fair market value determined? Do you use an objective measure, such as a multiple of profits or revenue, or do you take account of the loss of services, expertise and contacts of the deceased owner? Fair market value, moreover, can mean different amounts for different purposes, even for a stable business that has not suffered the loss of a key person.
A buy-sell agreement might also trigger rights in the event of the disability or other departure of one of the owners. Who is to determine disability? Who is to determine that a departure has taken place in the case of quarreling owners who refuse to cooperate with each other? Settling on a useful buy-sell agreement requires selecting from a menu of less than satisfactory choices.
Here are some key issues, some typical provisions in a buy-sell agreement for dealing with those issues, and a critique of those solutions.One owner wishes to sell out.
- Solution: Right of first refusal in the non-selling owner.
- Difficulties: Undermines marketability and can be used as a tool of harassment.
Owner deadlock over governance issues.
- Solution: “Put-call” provisions, where one party names a per share price, and the other owner or owners have a right to buy or sell at that price.
- Difficulties: “Death sentence” remedy may be too draconian for the dispute in question.
Death of an owner.
- Solution: Either a put, the right of the estate to force either the company or the other owner to buy the interest, or an option entitling either the company or the surviving owner to buy the ownership interest of the deceased owner.
- Difficulties: Valuation formulas, lack of liquidity (which, however, can be ameliorated by life insurance).
A co-owner quits or is disabled.
- Solution: Trigger a shift in control, so the active owner can continue to run the business and make decisions.
- Difficulties: Defining whether someone has quit or has been fired and whether a disability has occurred. Also, in the event of a disabled owner, there are no life insurance proceeds with which to purchase the interest, if that is what the parties agree to.
If a key person is going abroad, or it is felt by the employer that they undertake hazardous pursuits, then it is possible to insure the key person against death and permanent disablement by way of an accident through Life Assurance (Insurance).
The life cover is taken out for an agreed period of time (for example, five years). If the key person dies within the term of the policy then the proceeds are paid to the company.
A whole of life insurance provides the potential for continued cover of the key person for the remainder of their life. There are many types of whole of life plans; however, normally key person insurances are taken out on a “maximum sum assured” basis. This is an eight or ten year term of premium payments followed by a review where the premiums are reassessed according to the new age of the insured.
A critical illness insurance pays out the benefits upon the confirmed diagnosis of an illness/condition which is listed in a range of life threatening illnesses. The main benefit to a business would be in the circumstances of perhaps a heart attack where the key person was unable to work, but likely to survive for a considerable period.
PHI benefits to a company are usually paid after the key person has been ill for a waiting period of three to six months. The benefit is usually paid for no more than three to five years.
Do you expect to continue paying wages to yourself or a key employee in the event of sickness or injury? If your answer is, “of course,” you might be surprised to learn that it’s not as easy as you think.
Under current federal tax law, you must have a Qualified Sick Pay Plan in place prior to an employee’s disability–otherwise, any wages paid to (including FICA contributions made on behalf of) a disabled employee are not considered a business expense and therefore aren’t tax deductible. All it takes to avoid this situation is a simple agreement that sets company policy before a disability occurs, establishing who to pay, how much, when to begin, and how long to continue. Your plan must be adopted before an employee becomes disabled, and the employee must be aware of the terms of the plan.
How Can an insured plan Help? You can transfer some or all of the liability for plan funding. By transferring the risk from your business in the form of individual disability income insurance policies to an insurance company, you can budget a predetermined amount of money while everyone is well and working, and deduct the premium as a necessary business expense.
When Something Happens to a Business Partner… Do you have a buy-sell agreement? If so, does it have a disability buyout provision? If not, what would happen to your company if you or your business partner became too sick or injured to work?
In the event that one partner becomes disabled, a Disability Buyout Insurance policy can keep the business intact by allowing for a smooth transfer of ownership. Such a policy can help provide the balance of cash flow necessary to buy your disabled associate’s business interest.
How the non-disabled partner benefits:
- Maintains ownership and continuity of management
- Experiences a smooth transfer of interest because the conditions of the buyout, the purchase price (or formula), and the funding method are predetermined
- Has the assurance of the company’s continued existence because profits won’t be depleted
- The company receives benefits income tax-free (under current tax law)
How the disabled partner benefits:
- Has the assurance of a buyer at a predetermined and fair price
- Receives cash for his/her share of the business
- Is free from the risk of any future company losses
- Is free from the worry that family members would have to become involved
Protecting Your Business and Your Employees at No Extra Cost… Today, one of your largest business expenses is probably the cost of employee benefits. While the pressure for more and better benefit programs increases, the traditional options are becoming less affordable and are often too inflexible to address the specific needs of your business and employees. But there is a way to help employees protect themselves and their families from the financial pressures of illness or injury at almost no cost to your company.
By choosing a Voluntary Income Protection Plan that allows for payroll deduction, you can help solve a very real business need. As an employer, you endorse and sponsor plan enrollment, making time for employees to learn about the benefits. A small amount deducted from participating employees’ paychecks will assure a source of income in the event that an employee becomes disabled. You may also participate in the plan.
Nonqualified deferred compensation arrangements are all compensation arrangements in which the employee defers reporting the income, but which are not “qualified” under the Internal Revenue Code. Qualified arrangements, an example of which is a 401(k) plan, allow for immediate employer deductions of amounts set aside for employees, despite the employees not having to take those amounts into income, as well as tax free “inside build up” of income accrued on the assets set aside for the employees. In other words, qualified plans allow a radical mismatch of the timing of income to the employee and a deduction to the employer. Nonqualified plans, in contrast, allow for half a loaf, deferral of income by the employee, but no immediate deduction to the sponsoring company.
Qualified plans entail a considerable compliance burden on the part of the employers and are subject to both dollar limitations, that is to say, limitations on how much the people running the company can grab, and so called “nondiscrimination” rules, which are also designed to insure that the benefits of the deferred plan are not skewed toward highly compensated employees.
Nonqualified deferred compensation plans are, in contrast, cheaper to set up and administer than qualified plans, and are subject to no limitations relating to either the amount of compensation or who can or cannot participate. (Except, generally speaking, the benefits cannot be made available company-wide. Company-wide deferred compensation arrangements must be administered as qualified plans). The disadvantages consist of, first, foregoing the tax benefits described above, and, second, that, generally speaking, the funds “set aside” for the benefit of the employee are subject to the claims of the creditors of the employer. In other words, retirement benefits accumulated under a nonqualified plan are not as safe as benefits set aside in a qualified plan.
The touchstone of any nonqualified deferred compensation plan is the issue of “constructive receipt.” If cash, stock or other property is “constructively received” by an employee, that employee has to pay taxes on the amount deemed received. Nonqualified deferred compensation plans that work as designed allow the employee in question to accrue a benefit, but not be deemed to have constructively received that benefit for tax purposes.
Nonqualified deferred compensation plans vary because there is no one way to design around the constructive receipt doctrine, and each employee and each company has different needs and limitations. Such plans are often paired with qualified plans, so that top management is in the same boat as lower paid employees for purposes of a qualified plan or plans sponsored by the company, but then enjoys additional, less highly tax favored compensation, in the form of either stock options or a promise to receive, at some point, stock, stock options or cash. In all events, the promise must be unsecured, that is to say the beneficiary of the promise is left to the vicissitudes of the company’s fortune. As between the employee and third party creditors, third party creditors will enjoy equal or superior status to the executive’s deferred compensation claim. Note, however, that as between the employee and the company, the company can agree to set aside funds so that, short of bankruptcy, receivership or attachment by creditors, the company will have no ability to divert the assets pledged to the employee under the deferred compensation plan. This arrangement may involve the establishment of a trust, such as a “rabbi trust,” so named because the first ruling issued by the IRS approving this arrangement involved a deferred compensation arrangement between a rabbi and his congregation.
There is much to be said about nonqualified deferred compensation plans, but all of it depends upon the resources and needs of each company and of the employee or set of employees considering such a plan.
That being said, three illustrative plans are as follows:
1. The company annually credits a fictional account on behalf of an executive, with the payment measured against the company’s performance for that year. The accrued benefit, with or without an interest factor, would be paid to the executive either in a lump sum or over a period of years, starting on either a date certain in the future, or the date of that employee’s termination, retirement or death. The executive has income, and the company has a compensation deduction when the money is given to the executive.
2. The company issues stock to the executive. The stock is (1) subject to restrictions on assignability; and (2) subject to forfeiture in the event of some undesirable happening, such as the executive leaving the firm before a prescribed number of years.
The executive has income (and the employer a deduction) when the restrictions lapse.
3. The company issues options to the executive which entitle the executive to purchase stock in the company. Although such an arrangement is not “qualified” in the sense discussed above, there are two kinds of stock options, one of which is confusingly referred to as a qualified stock option and the other of which is known as a nonqualified stock option. The formal name for qualified stock options is incentive stock options, or ISO’s. ISO’s are, from the executive’s point of view, taxed more favorably than are nonqualified options. There are lots of nonqualified options and lots of ISO’s in the world, because there are advantages to both.
The BeniComp Select reimbursement plan (underwritten by Pan American Life) can reduce your cost by transferring your expenses from a personal, after-tax cost to a deductible business expense.
BeniComp Select provides an annual benefit of up to $200,000 per family (subject to a $20,000 per-occurrence limit for charges related to fertility treatment, per employee or family unit during the calendar-year).
Please click on the following link to my personal BeniComp agent portal to find out how it works:
Scroll all the way to the bottom of the page and click ‘Get Started’ to complete the online application in 5 simple steps.
- Select $200,000 for the plan limit.
- If you need a copy of your benefit summary (summary of plan description), please let me know.
Note: BeniComp Select can backdate the plan to the first day of the previous quarter.
Please email a confirmation once you have submitted the on-line application.