It's your money. Start taking control of it. We all work hard for our money, but only a small percentage of us make our money work for us. Be one of those few. Start taking the first steps toward fiscal fitness.

Many business owners today are familiar with keyperson life insurance. They know that if a keyperson is insured and dies, then the company generally receives income tax-free proceeds from the policy. Who is a keyperson? Someone whose death would have an adverse economic impact on a business. The owner(s) is typically the most important keyperson. But few people understand how keyperson life insurance can sometimes spell the difference between life and death for a small or medium-size firm, especially if the owner dies suddenly. This article is designed to help you see the value of keyperson coverage in appropriate situations and to provide some information about valuation techniques that can help you determine how much, if any, coverage your company may need. Why buy keyperson life insurance?

Keyperson insurance can help a company survive by minimizing the organizational loss and fiscal strain that follow the death of a key employee and by helping to assure that:

* Business loans can be repaid. When a keyperson dies (especially an owner), a lender may have the right to call the loan. The insurance proceeds can help pay off that loan.

* Credit can be maintained. At the death of a keyperson, lenders may become reluctant to lend new money to the business or refinance outstanding loans. The insurance can help the firm maintain its credit rating by allowing it to pay its bills in a timely matter in spite of the death. It also demonstrates to the lender that the firm is well managed.

* A replacement can be recruited and trained. Months may pass before a qualified candidate can be found. Then it may take time to train him/her to the point where the replacement is as competent as the predecessor. There may also be a recruiter's fee to pay. So the insurance proceeds, in effect, buy time for the business.

* The business is indemnified for lost sales and profits. Some keypeople (e.g., the owner, the leading sales professional) may be extremely difficult to replace. Insurance proceeds can help offset the future loss in revenue that will probably occur, at least temporarily, at their death.

* Stock can be repurchased. If the business is a corporation, any common stock owned by the key employee can be repurchased with the insurance proceeds.

How Much Insurance?

There are a number of valuation techniques that have been developed to determine how much keyperson insurance is needed. Several of the more popular techniques are described below. Remember that no one method is best; a business owner may want to use a combination of these methods. Only the owner can really evaluate the potential loss and the effects of a key employee's death.

Method #1: Multiple of salary valuation. The key employee's value is estimated based on a multiple of current compensation. Frequently, a multiple of three to five times his/her salary is utilized. If the keyperson's salary is $75,000, the amount of insurance might be $225,000 ($75,000 x 3).

Method #2: Replacement Cost. First, figure out how much additional salary is being paid to the executive above the pay for the routine duties of the position. For example, if his/her salary is $80,000 but the routine part of the job amounts to $25,000, the additional skills are worth $55,000. Second, estimate how many years it would take to fully train a replacement to handle these extra duties. Assume two years. Third, multiply the above factor ($55,000 x 2 years equals $110,000 of life insurance).

Some of the other valuation techniques are more complicated and can't be adequately addressed in this article. Because it is simple and sensible, some business owners simply insure one year's profits.

If you buy a keyperson life insurance policy and the keyperson lives, you may have made a small mistake. If you don't buy a keyperson policy and a keyperson dies, you have probably made a big mistake. Your company can absorb small mistakes; big mistakes can absorb your company.

Biography: Mr. Eisenstadt is a lifelong resident of Glen Cove. His children are proud to be fifth generation residents of Glen Cove. Bob and his wife, Doreen, are active members in the community. Bob is a former business owner in Glen Cove. He is currently a registered representative of AXA Advisors, LLC and agent of The Equitable Life Assurance Society of the United States located at 1983 Marcus Avenue, Suite 260, Lake Success, NY 11042. He can be reached at 358-3927 Fax: 516-488-1081.