With the recent news coverage of Oscar Munoz, the new chief executive officer of United Continental Holdings Inc. undergoing treatment at a Chicago hospital after suffering a heart attack, many people are reviewing what a loss of a senior leader could mean to a business and its value. They are reviewing the options available for key person coverage and how to structure it. With the myriad of product options available, how are companies designing policies to meet unknown needs with flexible options?
Companies often are urged to buy key person insurance to protect them from losses if an employee who is invaluable to their business dies. Think of a founder who is strongly identified with the company’s success or a top salesperson who brings in the bulk of the annual revenues. If that person were to suddenly expire, it’s likely the business would lose considerable income in the short term. The market value of United Continental Holdings lost $280 million in one day on the recent news.
Goldman Sachs Group chief Lloyd Blankfein disclosed a lymphoma diagnosis recently. Sara Lee Corporation’s CEO, Brenda Barnes recently stepped down due to a stroke and Apple Inc.’s Steve Jobs recent death further illustrate the economic impact that can happen to a company’s balance sheet during a severe illness or death.
This could be due to the cash liabilities that need to be satisfied to the estate or bank loan covenants that would be triggered or a dividend to a charitable foundation that would be reduced. The insurance is intended to compensate for the loss and help the business smoothly rebuild and operate.
The problem is that often these key people leave the company or move to different positions where they are no longer so crucial. Then the business could be stuck paying premiums on the policies. The alternative is to surrender the policy and possibly suffer a loss.
Joe B. Jones, Managing Partner and founding principal of Executive Benefits Network in Kansas City, says key person policies are vital to surviving the unexpected loss of a leader. Often these policies were designed to build up cash slowly over years and combined with a deferred compensation plan would act as part of a long term incentive plan for the executive to stay and not leave the company to work for a competitor.
Fewer executives stay with a one company for their entire careers these days. This results in a newer plan design that allows a company to use the cash as an asset on their balance sheet and the flexibility to change to a new insured if the executive leaves. Many of these policies are designed for a short term funding period, one to seven years, with 100% cash values from day one and then they will not need future premiums going forward based on current economic conditions and projections.
Many venture-backed companies use these policies on an ongoing tool to protect their investments. The policies are issued by some of the highest rated companies in the financial sector and can count towards bonding or capital requirements. There is over $150 Billion dollars of cash values in the banking industry and many broker-dealers and construction firms use this financing tool because of its multiple uses and rate of returns.
Jones says that if you haven’t reviewed your policies in a number of years or if your company would suffer an economic loss from losing a leader that you should take a look at the new options available today.
For more information on this idea, please contact a consultant at Executive Benefits Network.