The benefits of key employee life insurance

If you employ a key person who significantly contributes to the success of your business, have you considered how losing such an employee could impact your operations? Key employee life insurance can help protect your business from the financial consequences of a key employee’s death. Consider the following hypothetical case.

Peter, a talented chemical engineer, works at ZZ Plastics, Inc., a plastics fabrication company. In his seven years with the company, Peter has developed several important compounds, in addition to an innovative process for manufacturing automobile engine blocks. Because he has been so instrumental to ZZ Plastics, and his work has propelled the company to the forefront of its industry, Peter is considered one of the company’s key employees.

ZZ Plastics’ owners realize the importance of Peter to the success of the company and have established a key employee life insurance policy. Such a policy can be of great benefit in the event of the loss of such a valuable employee.

How Does the Employer Benefit?

A company such as ZZ Plastics may benefit from life insurance held by the company on a key employee in the following ways:

• Proceeds from the policy can provide ZZ Plastics with compensation for the loss that could result in the event of a valuable employee’s death. The company could then use the money to recruit a new employee with credentials/capabilities similar to those of Peter, train the new employee, promote additional sales, or provide for improvements that would eventually compensate for the loss sustained following the death of such a key employee.
• Permanent life insurance on a key employee could provide ZZ Plastics with an accumulation of funds to be used in emergencies. Payment of the annual premiums provides an accumulation of funds with an increasing cash surrender value. Ordinarily, the fund has a guaranteed cash value, as the cash surrender value can be determined for any period of time. Guarantees are based on the claims-paying ability of the issuing company.
• By maintaining key employee insurance, ZZ Plastics may strengthen its credit. The insurance may be used as supporting collateral for loans and may be considered evidence that the company will continue to meet future obligations, even when the insured key employee is no longer part of the company.

How Does the Employee Benefit?

While life insurance on a key employee can help protect ZZ Plastics against the premature death of Peter, there is no guarantee that such a key employee will remain with the company until retirement or death. Therefore, establishing a deferred compensation plan for that employee may provide an incentive for the desired employee to stay with the company.

Under this plan, ZZ Plastics would enter into a contract with Peter to pay certain benefits upon his retirement. ZZ Plastics may require Peter to promise not to compete (a noncompete agreement) with the company after his retirement. Such an agreement is a separate plan and isn’t tied directly to the insurance contract. However, life insurance can be an advantageous way to fund such an agreement.

A combination key employee deferred compensation plan may be adopted and funded with a single life insurance policy. That policy would provide indemnity to ZZ Plastics in the event of Peter’s death and would also serve as a source of retirement income for Peter upon his retirement. ZZ Plastics would take out a life insurance policy on Peter; he would not be a party to this insurance contract. Then, at the same time, ZZ Plastics and Peter would both enter into the deferred compensation plan.

Therefore, ZZ Plastics would have indemnity protection until Peter’s retirement date. Upon that date, the company can surrender the policy and use the proceeds to make the deferred compensation payments. This type of key employee insurance plan doesn’t have to cover any specific number or class of employees. It may be particularly appropriate for companies that don’t wish to establish qualified deferred compensation plans.

If you have employees that are vital to the successful operation of your company, consider taking the steps that ZZ Plastics took and purchase life insurance as protection and incentive for key employees.

Guarding against dangerous gases

You can’t see them, you can’t taste them, you can’t even smell them, but they may be lurking in your place of business. Both carbon monoxide and radon can be a danger to you, your employees, and your customers. Similar to lead, carbon monoxide and radon enter the bloodstream through breathing, and high levels of ingestion can cause serious health problems.

Carbon Monoxide

Carbon monoxide (CO) is a gas produced by internal combustion engines, including diesel and propane-powered engines, and other items that burn fuel, such as gas stoves, furnaces, water heaters, and space heaters. CO is also produced by burning wood, paper, or plastic products, as well as from welding, if carbon dioxide shielding gas is used. Workers can be exposed to CO in warehouses that use propane-powered forklifts or packing facilities. Exposure can also occur when operating small gasoline engines, such as pressure washers, concrete cutters, water pumps, generators, and air compressors. If your business lacks adequate ventilation, or if any of these items are not properly maintained, you and your employees may be exposed to carbon monoxide poisoning.

The symptoms of CO poisoning are similar to those of the flu or even the common cold, including nausea, vomiting, headache, fatigue, dizziness, and chest pain. Because these symptoms are present in many common illnesses, it may be difficult to recognize CO poisoning. If left untreated, CO poisoning may lead to illness, neurological damage, and death. The Centers for Disease Control and Prevention (CDC, 2007) reports that over 500 people per year in the U.S. are fatal victims of “unintentional carbon monoxide poisoning.”

If you have not already done so, consider contacting your local utility company to inspect any equipment you suspect may be faulty or that might contribute to a reduction in the air quality of your business. The following steps can help minimize exposure to CO poisoning:

• Allow fresh air into your business regularly.
• Don’t operate internal combustion engines in enclosed spaces or indoors. If this equipment must be used, increase ventilation.
• Provide safety training and warning labels for all gasoline-powered equipment.
• Be diligent about equipment maintenance to reduce CO emissions.
• Conduct a workplace survey to identify all potential sources of CO exposure and educate employees about CO poisoning.

Radon

Another deadly gas that may be lurking in your place of business is radon. Radon gas is produced as uranium decays. It is prevalent in soil and rock, which decay underground. Like CO, radon is odorless and colorless. According to the Environmental Protection Agency (EPA, 2009), radon is the leading cause of lung cancer deaths among nonsmokers and claims the lives of about 20,000 Americans each year.

Unlike CO poisoning, radon exposure does not cause any physical symptoms. In fact, it takes years of exposure at relatively high levels before any symptoms occur, and even then, the only documented symptoms are the same as those for lung cancer, such as persistent cough, shortness of breath, coughing up blood, and wheezing.

Underground workplaces, such as mines, caves, and utility industry service ducts, can have significant levels of radon. All workplaces including factories, offices, shops, classrooms, and nursing homes can also be affected. While employers who occupy buildings from the first floor and above are unlikely to have significant radon levels, employers who use cellars, basements, and poorly ventilated ground floor rooms may have problems with radon levels.

Any building below three stories should be tested for radon. Below are a few facts to help you better understand radon and how it can affect you and your employees:

• Radon enters buildings through openings such as foundation cracks and porous floors.
• Even if neighboring buildings have normal levels of radon, your building may not have normal levels.
• Radon may be present in your water supply.
• Radon has been found in all 50 states.

If you are wondering whether or not radon may be present in your place of business, you can test for it yourself by purchasing either a short-term or a long-term test kit. Be sure that the kit has EPA approval to help ensure accurate results. If you want to hire a professional, qualified radon mitigation contractors are available across the country.

Education = Protection

Fighting a danger you cannot see, taste, or smell can be challenging. That’s why awareness and education are so important. For more information about protecting yourself, your staff, your customers, and your business from carbon monoxide, radon, and other dangerous gases, visit www.epa.gov.

Taking on a risk management role

There may not be anything unusual about your day today, but you never know what tomorrow has in store. Overnight, a theft, natural disaster, fire, or lawsuit could affect your business dramatically. Therefore, risk management deserves a top ranking on your list of priorities.

What Is Risk Management?

Risk management involves an awareness of your business’s exposure to danger, hazard, crime, or any other uncertainty, and doing what you need to do to protect your business from those risks. It also means having the right kind and amount of insurance coverage to maximize opportunities and minimize adverse effects. Risk management is an ongoing process that could mean the difference between overcoming a disaster and having to succumb to it and close your business. Of course, no one can eliminate risk entirely, but it may be possible to reduce its negative effects.

Risk Management Basics

1. List Your Assets: Note everything you need to protect in your business, including your building, machinery and other equipment, vehicles, computer data, cash, etc.

2. Identify Your Risks: What might expose your business to loss? It could be anything from irresponsible employees to mechanical problems, such as faulty machinery. Don’t forget about universal risks, including fire, theft, and natural disasters.

3. Focus on Loss Prevention: Loss prevention is the key to risk management. This could mean improving workplace safety, training workers on how to use equipment properly, creating tougher hiring procedures, and rewarding employees for their dedication to improve morale. Always have an emergency plan in place to curtail your losses.

4. Spend Insurance Money Strategically: Put your premium dollars where they will do the most for your business. For example, you may want to increase deductibles wherever possible and put the money saved toward an umbrella policy for a peril of catastrophic proportions.

5. Evaluate the Big Picture Regularly: Circumstances change over time. A regular review of your overall risk management program allows you to recognize new risks, develop loss prevention solutions, and update your insurance coverage to better address your needs.

Your ability to think like a risk manager is necessary for the survival of your business. We encourage you to take on this role, but we don’t expect you to do it alone. We’re here to help you with your risk management program. Please stop in or call us for assistance.