The unexpected death of an executive can wreak havoc on a business. No matter how well your business is prepared to deal with problems, when an executive within your company suddenly passes away, it can cause confusion and disarray. You may not know the best direction to turn and your business operations could suffer as a result. Read on to learn what key person insurance is.
How Does Death Affect Business Operations?
When an executive of a company passes unexpectedly, it can have a dramatic impact on business operations. In addition to dealing with the grief and sadness that comes with the death of a friend, employees must step in to take over certain day-to-day operations until a replacement can be found to fill the talent gap. Conducting business as usual is no small feat without the presence of a top executive. Do you know who would be next in line to take over the person’s responsibilities and would that person be prepared to take on these new roles?
The death of an executive can impact nearly every component of a business, including finances, tax information, banking information, payroll, and various other elements that help a business run smoothly. If an executive should pass away today, would you know how to obtain his or her passwords to gain access to banking information, emails, or servers? Would you be able to find the data you need regarding vendor contact information? These are all the things you need to consider far in advance. While you can never predict when an executive will pass, you can ensure that your business is well-prepared in the event that it does happen.
What Is Key Person Insurance?
Having life insurance on a key person within an organization is crucial if you want to be prepared for the death of an executive. Key person insurance is a type of life insurance policy that a company purchases on an executive’s life. In this case, the company would be named the beneficiary of the plan and would be responsible for paying policy premiums. If the executive suddenly passes away, the company would receive the insurance payoff. The main purpose of key person insurance is to help ensure that a company survives after losing a key person.
The payoff from key person insurance following a death is often used for a range of purposes. First, a company may use the proceeds to pay off debts, pay severance to employees, distribute money among investors, or find a replacement person. In some cases, a business will use the funds to close down the business in a respectable manner. Not sure if your company really needs key person insurance? As a general rule of thumb, key person insurance is recommended if the person’s absence would sink the company. If a company is a sole proprietorship and only employs one worker and there are no other people that depend on it, key person insurance may not be necessary.
What Does Key Person Insurance Cover?
Key person insurance covers a variety of expenses which can help a business carry on upon the death of a top executive. Some of the most important expenses key person insurance will cover includes:
- Financial losses that occur when a key person has not died but is unable to work for an extended period of time due to an illness, disability, or other covered situation.
- Lower-than-normal profits due to lost sales, cancellations of business projects, or financial losses stemming from business delays. Key person insurance can help offset this lost income.
- Shareholder and/or partnership interests that a company would like to retain after the unexpected death of an executive.
- Insurance for anyone that is involved in guaranteeing banking facilities or business loans. The insurance coverage is valued to match the value of the guarantee.
How much key person insurance you will need depends on your unique business and what you are realistically able to afford. You can find policies for all price points ranging from $100,000 up to $1 million or more. If you are interested in key person insurance, ask for a quote for your business.
How Can I Safeguard Against the Unexpected?
It is always wise to prepare for the unexpected when it comes to your business. Do you have a plan in place if a business owner or top executive should suddenly become too ill to work, if he or she suffered a severe disability, or died unexpectedly? What if the person exited the business with little to no notice? Having a plan in place can make a big difference going forward. In addition to having key person insurance, there are some other important safeguards you should have in place to ensure that you can continue business as usual.
One of the best things you can do to prepare your business for the unexpected is to prepare a shared source of important information that all top executives can gain access to. This shared source of information should include vital details like tax info, passwords, financial data, and the names and details of any shareholders associated with the company. Of course, you will want to keep this information in a very secure place and only give out this information to those who need it, such as the next person in line once a top executive is gone.
Learn More About Key Person Insurance
You may think that your general business insurance is enough to keep your business safe from the unexpected. Unfortunately, this is not always the case. If a top executive should suddenly pass away, your general business policy may not provide the funds you need to continue operations as normal. In some cases, your business could financially fail and you could be forced to shut down. Key person insurance works in the same way as life insurance but instead of providing family members with benefits, the business is the beneficiary of all proceeds. For more information about key person insurance, speak to the succession planning consultants today at BBG Broker.