Since a ratio of 2:1 is desirable, this company is operating in a non-liquid condition because of its current ratio:

With current liabilities of $180,000, current assets would have to be $360,000 to achieve a current ratio of 2. Thus, there is a deficiency of $160,000 ($360,000 — $200,000). Life insurance would not provide additional working capital or correct the immediate liquidity problem. Corporate-owned life insurance in this amount could enhance the company's credit position, however. What's more, $160,000 of key person life insurance would stabilize the current ratio at 2:1 or more in the event of the death of a key manager or shareholder.

By using the same example, applying the acid test can further confirm or reveal insurance needs. A company with a high inventory level could find itself in trouble caused by the death of the individual with the experience and skills to move heavy inventory on a profitable basis. For example:

In this case, the company shows an acid test of 0.55, instead of the 1.0 typically desired. The hazard of a heavy inventory reveals the need for at least $80,000 more in cash or accounts receivable.

Here again, we see the need for key person life insurance. Should death remove the key person who has the know-how to convert an inventory position into an operating profit, key person insurance proceeds could do much to restore credit stability.

To protect a company's liquidity, annual business life insurance premiums could be approximately 10 percent of executive payroll. Each client and situation is different. Once the dollar commitment has been made, the shape of the business insurance can be tailored accordingly.