Do you have an executive or employee who is critical to your business’s success? If so, you need key person insurance. Also known as key man insurance, key person insurance is a type of life insurance policy that a business can purchase on a person’s life who is considered an essential component of their company. As replacing a key person can take time and money, while potentially costing the company valuable clients, having key person insurance can help a business continue normal operation during the transition. Learn more about key person insurance and when it should be acquired.
Why Acquire Key Person Insurance?
The most important assets of any company are its people. Over time, a business can become highly dependent on an executive or employee for its success. When that staff member chooses to step away from the business, suffers a major illness or injury, or passes away; it can leave a company scrambling to maintain normal business operations. While key person insurance does not replace the valuable staff member, it can help provide financial assistance until you can find a replacement. There are many different instances that may call for key person insurance and you do not want to wait until they occur before acquiring protection.
One situation that can occur relates to what an executive or employee delivers to a business. In some cases, a sole person may act as the “face” of the business. When people think about of your business, they may picture a certain person or name. In some instances, it is not the person’s face or name that people recognize, but the skills they bring to the table. A single person’s reputation can have a major impact on the success of a business. If this person passes away, their death could be detrimental to the future of a company.
Sometimes the death of a key employee or executive can lead to financial problems for a company. Losing this person could potentially jeopardize your ability to continue operating your business resulting in lost sales or earnings. Along with your profits, your company could suffer in other ways. If a key person passes, you are essentially losing specific knowledge, a valuable skill set, productivity, and the confidence of your consumers and creditors. Key person insurance can help your business by providing a monetary payment as you progress through this loss. The right policy can help make up for any lost sales or earnings, help cover the costs of finding and/or training new staff, pay down debt, and assure creditors and customers that your business is still viable.
There may come a time when you need to obtain a loan or seek financial assistance from investors to help grow your business. Unfortunately, most banks and investment firms will refuse to provide a loan or make an investment in your company unless you have key person insurance. In some instances, a financial institution or creditor may require collateral for a loan or require that a lien be placed on a key person policy.
When dealing with these types of situations, it is important to remember that your business may have more than one key person. If this is the case with your business, you could save money by purchasing a key person policy that includes a “first to die” provision which would essentially cover any remaining employees or executives if the covered staff members were to die. It is also important to note that a key person does not have to pass away for a business to be covered by key person insurance. Some policies will also cover losses if a key person is unable to work for an extended period of time due to a severe injury, illness, or disability.
Another situation in which key person insurance would be considered extremely valuable is if you run with your business with a partner. While you might not expect anything to go amiss, there may come a time when either you or your partner wants the ability to buy out the shares of the potentially deceased partner. With succession planning, the shares held by the key person would ordinarily be transferred to the family or other beneficiaries. Key person insurance can provide the necessary funds to buy them back. An insurance policy may also pay out any buy/sell agreements in which stakeholders entered into a contract on what would happen to their shares upon death.
Acquiring Key Person Insurance
A business may require a key person insurance policy if it relies on one or two individuals for its success. You may want to consider acquiring a policy if your company depends on an individual to generate a large portion of the company’s income, the person’s unique skills would be difficult to replace, your business has debt that would be difficult to pay off if the key person was disabled or died, or if your business plans to take out a loan or work with investors. Key person insurance is also a good idea if your business plans to merge or go public.
How much insurance you need will depend on a number of factors. To determine the amount of key person insurance needed, estimate the economic loss your business may suffer if a key person became disabled or died. This includes any lost revenue or profit. Also take into account the expenses involved in recruiting, hiring, and training a replacement person to help run the business. An insurance broker that offers executive planning services can help you calculate the amount of insurance your business may need based on these unique details.
The cost of key person coverage depends on a number of personal factors, such as the age, sex, and health of the insured person. The nature of the business and its size will also be considered when creating a policy. For more information about how much coverage to acquire, how to determine who owns the policy or any other questions you may have, contact the brokers at BBG Broker today.