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BusinessColumnistsJamie Herzlich

Small Business: Insuring against loss of key employees

Many small businesses have a key employee or two whose long-term absence would have a serious impact.

If the void is due to death or disability, key-person insurance can help you hedge your loss, experts say.

"It's a low-probability, but a high-severity situation you're protecting against," says Dan Hochler of Forest Hills Financial Group, a financial planning firm in Forest Hills, Manhattan and Melville.

The likelihood of someone dying during their employment may not be high, but you're protecting against "the God forbid," he says.

Life or disability coverage. Key-person insurance can be purchased as either life or disability insurance and would provide a payout if a key employee dies or becomes disabled, he explains. The company pays the annual premiums and is the beneficiary on the policy, using the proceeds to help offset lost revenues, recruitment costs and the like, Hochler says.

The policy term can span from 10 to 30 years, with premium costs generally increasing the longer the term of the policy, Hochler says.

Check out costs. Premiums vary depending on such factors as age, health and amount of coverage, but, for example, a 10-year term life insurance policy for a healthy 50-year-old with a $250,000 benefit could cost the company as little as $500 a year, he explains.

When determining the amount of coverage, it can be difficult placing a monetary value on a key employee's life.

"It doesn't have an automatic calculation," says Abraham Kaltsas, a financial adviser and insurance specialist with Kuttin-Metis Wealth Management, a Melville practice of Ameriprise Financial Services Inc.

Factors to consider. These include potential lost revenue, the cost to replace the key person and training costs, he says.

"I have to train someone, and that takes time, and time in small-business settings is costly," Kaltsas says.

Who's critical? He advises companies to take stock of employees critical to their operation and profitability to determine whether there is a need, and then quantify what that need is. This is often something many small businesses, so entrenched in the day-to-day work, don't think about, he says. "That's the number one problem."

In most cases, you're not insuring the owner, because in most small businesses if the owner died, that would be the end of the business, notes Mark Legaspi, president of Legaspi Associates, a Miller Place insurance brokerage specializing in employee benefits and insurance. The policy instead would be taken out on someone like a chief operating officer or key sales person, he says.

The executives whose contributions are so crucial that without them the business could fail are the ones to insure, says Loretta Worters, vice president of communications for the Manhattan-based Insurance Information Institute.

Do the math. When considering this insurance, assess your budget and weigh that against the loss you think you could incur, Legaspi says. If you can't afford, say, a $500,000 policy, even $250,000 is better than nothing, he says.

"Having some sort of benefit is going to help either way regardless of the amount," he notes. He says he's found small businesses are going for $500,000 or more.

Shop around. And it helps to compare different carriers, Worters says.

When determining the length of the policy, cost is a factor, but also consider how long that person might be employed with you. For instance, a younger executive may warrant a lengthier policy.

"It's really on a case-by-case basis," Hochler says. "It's not one-size-fits-all."


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