Guest Column: Research insurance to protect key employees, owners

As jobs are being trimmed at large corporations, more Americans are taking the plunge and starting their own businesses. Most who own a business can tell you that being the boss entails a big to-do list.

Making sure the business and its key players are properly insured can easily be forgotten, but for most up-and-coming businesses, owners and employees are important assets.

How harmful would it be to the business if anything happened to those individuals?

Business insurance is not a matter to be taken lightly. Nothing would be more disruptive to the potential success of an enterprise than to lose a primary contributor due to an unexpected death, extended illness or disability.

Fortunately, there are steps that business owners can take to make sure protection is in place for such occurrences.

Covering key employees

The future viability of a business can be placed in serious jeopardy if a key person is lost permanently or for an extended period of time.

Forward-thinking business owners shouldimplement key person protection to help defray costs associated with losing or replacing that individual.

Ideally, a business purchases a life and/or disability insurance policy for each key employee and is named as the policy owner and beneficiary. Keep in mind that the primary purpose for such a policy is not to benefit the employee whose life is covered but to protect the company.

Buy-sell agreements

In circumstances where multiple individuals own a company, it is crucial to have a buy-sell agreement in place, typically funded with life insurance.

Such a policy outlines specific triggering events - such as death, long-term disability or retirement - that would result in the buyout of one owner.

This gives surviving owners a way to purchase the interests of the owner who passed away, became disabled or retired from the firm.

The goal is to make it financially feasible for remaining owners to pay for the buyout while providing a fair settlement for the interest being sold.

Such an agreement is based on a current valuation of the company, so it is important that any buy-sell agreement be regularly updated.

Executive benefits

Additional benefits for owners and other key employees are available as well. Specifically, companies have the option of providing life and/or disability insurance for executives that go beyond what's available to all employees.

This includes funding personal life insurance for individuals. In this instance, the employee is the owner of the policy and can name the beneficiaries. This additional benefit for a key contributor can help a company retain top talent.

Another option in creating such a benefit is to use a "split dollar" approach. In this case, the company pays the premiums, but has an agreement with the covered employee to repay the premium to the company with interest.

Those payments are made from life insurance proceeds if the employee dies or from the cash value if the individual's term with the company ends.

The remaining proceeds go to the named beneficiaries such as family members.

Preserving wealth

If all goes well, a business can turn out to be the most valuable family asset.

That is why business owners need to pay careful attention to issues surrounding the disposition of a company after they die. While a buy-sell agreement is a critical part of any separation strategy from a company, individual owners also need to consider how best to preserve their estates. Legal documents such as wills and trusts can take on added complexity. If the business has attained significant value, using life insurance may be considered to help protect the value of assets being passed to heirs from estate tax liability.

One of the key advantages life insurance offers is that it can be used on a selective basis to help protect the business and individual owners to enhance the overall compensation package of key employees. If you own or plan to start a business, consider adding a life insurance review to your to-do list.Paula Dougherty, CFP, ChFC, CLU, is a senior financial adviser with Dougherty & Associates, Ameriprise Financial Inc. in Springfield.