An ESOP sponsor has one owner/employee who is key to the company operations. It is believed that in the event of his death, the value of the company will greatly decline. The ESOP participants have considerable value in the plan in excess of the cash within the ESOP and the liquidity in the company necessary to redeem all outstanding ESOP shares. The company is growing concerned about the dangerous situation should the key employee die.

Does anyone have any ideas or recommendations on how to hedge this risk? We have considered the purchase of term or whole-life insurance, but understand that this raises different issues. Has anyone delt with this situation before? Your advice/comments would be appreciated.

Hi eilano ---

If key person life insurance is purchased, the buyer should be the company and not the ESOP. There are too many issues/problems to deal with if the ESOP buys the life insurance.

What happens to the company if the key employee retires or otherwise leaves the company for a reason other than death? This is also a risk that you might think about. Perhaps something should be done to put other employee owners in a position where they can replace the talent of this key employee (when it becomes necessary to do so).