Group Term Life Insurance.
This is one of the most popular benefits offered to corporate executives due to its favorable tax approach. The beneficiary of the policy is not subject to tax on the proceeds upon maturity and only the value of coverage in excess of $50,000 is included in the executive’s taxable income. The company is able to expense the entire amount of the insurance premium regardless of the amount.
Split-Dollar Life Insurance
Owned either by the company or the executive, this policy is a cash value life insurance on the executive’s life. Each year as the cash surrender value of the policy changes, the company is responsible for only the incremental change in the value of the policy. The executive is responsible for the balance of the premium.
The advantage to the executives is that this policy is less expensive than the group permanent insurance and the premiums do not increase as the policy matures. One of the most important benefits of the split-dollar insurance is that younger executives can receive additional coverage and in case of death, proceeds from the policy equal to the cash surrender value are paid out to the company while the executives beneficiary receives the balance. Economic benefits from this policy are taxable.
One of the major demerits of this type of insurance is that the premiums are not tax deductible. The company recovers the premiums paid out during the course of normal business operations upon the death of its executive or when the executive decides to purchase the policy during his lifetime. The accounting treatment of premiums on split-dollar life insurance is recording the cash outlay as a non-current asset.
Key Person Insurance
Internet startups depend on the technical expertise and skills of a select few people. These key employees are critical for the corporate vision, R&D and making the concepts a working reality. The success or failure of such companies is directly related to the well being of these key employees. The death of any such key person can have a substantial negative impact on the business operations. The key person insurance is the means for a company to insulate itself against such events. Upon death or retirement of such key persons, the policy becomes payable to the company. Proceeds received can be used to redeem executive’s stock options, pay off executives deferred compensation or to satisfy obligations to their dependants.
Since the company pays the premiums the benefits realized are also payable to the company. The premiums on key person insurance are not tax deductible, and the proceeds realized may not be regarded as business income. From an accounting perspective, the accumulating balance of the cash value of the key man insurance is treated as an asset of the business, against which loans can be issued. Any interest or dividends received are not taxable as long as the policy remains active.
What Should You Insure?
It is extremely important for a company to limit its exposure to various non-operating losses. Listed below is a checklist to assist you in determining whether all your assets of value are covered under your existing insurance plan.
- Inventory – raw materials, work in progress, finished goods Fixed assets
- Furniture and fixtures
- Equipment and machinery
- Other office equipment
- Computer systems – hardware and software
- Motor vehicles
- Valuable property – fine art, papers, documents, blueprints, schematics designs etc.
- Transportation equipment including, airplanes, autos etc.
- Any other personal property on or off the corporate premises
- Land – improved, unimproved
- Leaseholds premises
- Underground property – fiber optic cables, wiring, mines shafts, pipes and pipelines, storage tanks
Even though intangible assets are almost impossible to quantify and are not on the company books, they must be considered for the purposes of calculating exposure and risk management. Intangible assets can be internal such as R&D, intellectual property, goodwill and reputation, financial, personnel – knowledge capital, Rights – mining, mineral, oils, air, patents and copyrights royalty, etc.
There are several options and types of insurances available to a company. Here are a few:
- Burglary, robbery, theft
- Conversion or embezzlement
- Cyclone & tornado
- Motor vehicle
- Plate Glass
- Riot or civil disturbance
- Sprinkler leakage
Insurance loss containment
Operating a successful business operation requires the skills to maximize profitability and minimize losses. Therefore, it becomes important to build an organization complete with policies and procedures to contain any kind of loss. Even though insurance policies may cover the loss to a certain extent, the loss in terms of time value of money, resources and effort are unredeemable. The three basic kind of losses an organization can incur are property, liability and catastrophic. Discussed below are possible ways to contain such losses.
Establish an entire fire protection system complete with sprinklers, fire extinguishers and procedures on how to manage a fire evacuation. Fire drills should be regularly scheduled and practiced. Roles and responsibilities during such fire emergencies must be clearly defined and published.
Create signage and an OHSA compliant process for handling hazardous situations such at painting, handling inflammable materials and chemicals. Designate hardhat area under construction zones and keep unsafe equipment in cordoned off section.
Facility security can be further re-enforced by guards, smoke heat detectors, passive and active alarm system and surveillance cameras.
SOP – Standard Operating Policies handbook or employee handbook must establish internal security policies. Each employee must be given a copy of such policies with a termination clause in case of breach of security. Internal policies can cover Internet usage and email policy, checking employee references before hire, sexual harassment etc. Schedule regular internal audits of different departments to verify whether checks and balances are in place and the existence of strong financial controls over all aspects of business operations
Ensure that all exits are clearly marked and illuminated. Do not block entry and exit way with storage boxes or other articles. All exits should be easily accessible to the disabled.
In order for a business to limit the exposure to liability loss, the organization must pro-actively create a work environment that is safe and in accordance with OSHA regulation. Listed below are a few hints on reducing exposure and building a safer work place.
- Provide climate control work environment with proper illumination.
- Secure storage site for hazardous materials.
- Inspect the structural integrity of the facility.
- Inspect electrical wiring and equipment.
- Inspect fire prevention equipment.
- Provide work gear to prevent injuries.
- Educate staff on material and equipment handling.
- Establish a process to record, investigate and finally analyze all accidents.
- Random inspection of people, process and equipment to keep them crisis ready status.
Business organizations are subject to catastrophic loss in the event of a natural or man made disaster. To better handle such situations employees should be trained in emergency evacuation methods. The business should also prepare plans for disaster recovery of the facility, computer hardware, software and data. Daily backup tapes must be stored in an off-site facility. A process should be established and tested to keep essential lines of communication lines open. Finally, quality checks of product and equipment must be performed periodically to control the loss before it becomes catastrophic.