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Key Person Planning: Aligning Long-Term Goals

Key person planning is an essential tool for keeping an organization’s decision-makers engaged and aligned with a business’s long-term success. Importantly, it helps to ensure continuity if a key person departs or dies.

The lifeblood of any business is its talent. Top employees create valuable intellectual capital, forge influential connections and drive forward progress. That’s why it’s important to develop a strategy that recognizes their contributions, helps retain their services long-term, and ensures the organization thrives if a "key person" leaves.

What are its benefits?

Key person planning helps attract and retain talent, and ensures the right resources are there to ensure business continuity if a decision-maker dies or is sidelined. It is part of an organization’s comprehensive life cycle of risk management that spans the attraction and retention of talent to the protection and preservation of the company if talent is lost for any reason.

Talent attraction and retention

Talented leaders are in high demand. Globalization, technology, and the coronavirus pandemic have only intensified this demand. Key person planning can help organizations deliver on three things top talent want:

  • To be treated well.

  • To be able to have a significant impact on the business.

  • To benefit from the sale or transition of the business.

Continuation resources

When a key person dies, the transition that follows for both the organization and the executive’s family is made easier if cash flow is also not interrupted during an already stressful time. Key person planning ensures, in a structured way, that there is a pool of cash available in the event of an unexpected death.

Who is a key person?

There are a number of different ways to identify a key person. They could be a business founder(s) whose knowledge and dedication are integral to the organization’s success. Or it may be the rainmaker whose charisma, connections and expertise drive revenue growth. For our purposes, it is anyone who is critical to the success of the business. Regardless of how you define key person, what’s critical is their alignment with the interests of the business and their ability to impact results by virtue of their authority or influence.

How it works

When creating a key person program, it’s important for business owners to clarify what they want to achieve. This vision makes it easier to determine which benefits to implement, and how to structure and fund them. For instance, how should vesting work? If the business is in a talent-starved industry, a shorter vesting schedule could prevent poaching. But if the goal is to keep talent in place for the long haul and the market is not superheated, a longer vesting schedule may be appropriate.

There are various strategies for providing benefits to a key person which are specific to individual circumstances and preferences. These strategies are not mutually exclusive; an enterprise can use more than one approach.


The most direct funding option is to make a cash contribution into a key person account or to award a cash bonus. However, if a cash bonus is issued, research has found that the goodwill created lasts only a couple of months while the reward is fresh on one's mind.

Nonqualified deferred compensation

NQDC plans can offer tax-deferred savings that can far exceed the limits imposed by qualified plans. There are no IRS deferral limits or requirements, but there may be requirements stipulated in the agreement between the key person and the organization. There is also no guarantee that promised benefits will be delivered, as they are framed by variables such as the company’s financial health.

Stock awards

Stock awards and stock options often require a vesting period before the key person can claim the stock or its monetary value. These can provide effective long-term incentives and align the interest of the key employee with company performance. These plans can be restricted or unrestricted, depending upon the terms of the key person plan. That said, not all business owners will want their key employees to have equity in their company.

Long-term disability or Long-term care coverage

These are often popular with key executives, particularly if the disability of an executive on the team has occurred, making the value of the benefit apparent.

Life insurance-based executive compensation

One of the most flexible options for funding a key person plan is life insurance, which can be used effectively in a Section 162 Bonus Plan with a restricted endorsement bonus arrangement (REBA), a split-dollar arrangement, or as a stand-alone policy purchased on one or multiple individuals, as an informal funding vehicle to support a NQDC plan.

Life insurance offers two distinct advantages:

  1. Tax-deferred growth Paying taxes on key person benefits doesn’t sit well with many top executives, particularly if they’ve worked hard to build a closely held, family business. Life insurance offers the enormous advantage of tax-deferred cash build up and tax-advantaged access to cash.

  2. Flexibility One of the most valuable assets a key person or a business can receive is financial flexibility. Life insurance can ensure a tax-deferred (or income tax-free in the event of death) cash pool when needed (see sidebar). When used as part of a NQDC package, it provides a key person with the comfort of knowing their family will be financially secure if death occurs. And, if tied to a buy-sell agreement, it ensures the business has the funds needed to continue operations.

Life insurance allows a family business to continue Life insurance proved indispensable for the wife of a small business owner. Once estate planning and trust work were completed, her financial professional recommended key person life insurance be put in place on the life of her husband. This policy was owned by the business with the intent to indemnify the business against the risk of financial loss (or collapse) should he die unexpectedly. She balked at the idea because she thought there may be a better use of funds, expressing concern each year when submitting premium payment. But when her husband was unexpectedly diagnosed with cancer and died six months later, she had the financial resources to continue the business. Her reluctance was replaced by gratitude for the opportunity to continue the family enterprise—because even though she had been a part of the business, she had never had to run it alone. Years later, she still comments that the business would not have survived without this coverage.


Common pitfalls

Key person planning is critical to a company’s life cycle risk management program, which is why it makes sense to consult a seasoned financial professional early on in the process. There are three common pitfalls designers should be aware of, including:

  1. Misalignment Take care to avoid a misaligned approach to key person planning. For example, buying a car for a key executive every five years may sound great but has no relation to the responsibilities or incentives of the role. Even life insurance, while valuable, may be purchased for an executive as part of an uncoupled benefit that isn’t aligned to other benefits or to the goals of the organization in a coherent way. So, for instance, providing a life insurance policy that pays a death benefit to a key executive’s spouse without instituting a buy-sell plan may render it strategically useless; the benefit ends there, without furthering the goals of the company.

  2. Technical issues A common instance of a technical misstep is the use of beneficiary designations that are completely wrong for what the business wants to accomplish. It’s critical to include the client’s accounting advisor in the process to ensure proper execution from multiple perspectives. Other technical issues include programs that are not funded appropriately or documented properly when first established.

  3. No insurance coverage When insurance is not in place, either through oversight or procrastination, options can be very limited. Until a replacement is found and gets up to speed, the loss of a key person and associated revenue can jeopardize the business’ long-term sustainability. Placing insurance coverage when the key person is older causes premiums to become more expensive and may render the key person ineligible for insurance altogether if medical conditions make them uninsurable.


Overlooked drivers for key person plans

Incentivizing and protecting key executives as well as the business and its life cycle risk management program is the primary focus for most businesses when they establish a key person program. But here are three other reasons to keep in mind:

  1. External stakeholders need assurances The exit of a key person for any reason is disquieting for clients, creditors, and others. Concerns extend beyond what product is in the pipeline and really focuses on leadership continuity. A well-conceived and communicated plan reassures stakeholders that the business will continue to meet their needs should a key person leave or die.

  2. Fair market value (FMV) includes talent Business owners preparing an exit strategy will want to make sure they have key person programs in place to help retain their top talent, as potential buyers may view talent as part of the FMV of the business. Knowing that a plan is in place is akin to a buyer who is considering a purchase of a sports team and wants confirmation that a star player is under contract.

  3. Your reputation precedes you When companies treat talent (and their families) well, other key executives at the organization and those who might want to work there take notice. Magnanimity is attractive and may draw new talent to your organization.

Take the next step now . . .

Key person planning is a good life cycle risk management practice that delivers benefits and protection to key talent, as well as to the business, especially when a key person unexpectedly leaves.

For executives, it offers:

  • Financial security

  • An incentive to align performance with the goals of the organization

For organizations, it offers a means to:

  • Reward top performance and loyalty in a competitive talent landscape

  • Convey how much the company values and rewards performance

  • Plan for succession and ensure the long-term stability of the company

As part of a key person plan, life insurance can offer a flexible and tax-efficient way to realize these potential benefits. When implemented by a competent, creative financial professional, key person planning can help inspire top talent’s commitment to performance and ensure an organization’s longevity.

Have questions about key person planning or designing the right plan for your talent? Consult with our team who can help you understand the benefits and trade-offs and design a plan that’s right for you.

This information is for general and educational purposes and not intended as legal, tax, or accounting advice. TRC Financial is not authorized to give tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

All examples are hypothetical and for illustrative purposes only.

Cash value accumulation is determined by the policy contract, is not always guaranteed, and is subject to withdrawals.

An insurance policy’s financial guarantees are subject to the claims-paying ability of the issuing insurance company.


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