Funding Alternatives

Key employee insurance, of course, utilizes a life insurance policy as a funding instrument. Some business owners may be tempted to consider funding alternatives. These alternatives, however, have their drawbacks as discussed following.

A Regular Savings Fund

A company can set aside funds on a periodic basis with the hope there will be enough money on hand if a key employee dies unexpectedly. The drawbacks to such a plan:

current obligations may require the business to use the funds rather than set them aside
the funds can be easily withdrawn to deal with a more immediate problem
there is no guarantee the business will have enough time to develop a substantial fund before a key employee dies.

Periodic Investments

As funding to cover losses incurred as a result of the death of a key employee, making periodic investments has the same drawbacks as a regular savings fund. More than this, there is no guarantee the value of the investment fund will not fall at the very time the business has the greatest need for cash.

Life Insurance—The Preferred Funding Instrument

Life insurance is generally the preferred funding instrument to cover losses incurred as a result of the death of a key employee because—subject to the continued claims-paying ability of the insurer—it can guarantee a specific amount of money precisely when the money is most needed (assuming all premiums are paid when due and that there are no substantial loans or withdrawals). While term insurance may be used, cash value life insurance is usually preferred because it can provide additional benefits for the business.

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