If you are a business owner in the process of Executive Planning, or debating on starting the process, you may be thinking of acquiring key person insurance. Also referred to as keyman insurance, key person insurance is a type of business insurance that provides coverage for the key person in a company. The policy functions like life insurance by financially protecting your family and loved ones in the event that you pass away. However, key person insurance differs from personal life insurance as its main purpose is to protect your business. Learn more about key person insurance and how you can acquire it for your business.
What Is Key Person Insurance?
If a business owner or another significant employee within a company passes away, key person insurance would provide a death benefit to the business. Having key person insurance may make sense for your company if your business’ reputation and financial status is highly linked to a single person’s name, unique skillset, or reputation. And if that person should pass away, the business would be financially harmed. Key person insurance may also be used in partnerships. If two people own a business, they could each acquire key person insurance so that if one passes away, the other could buy out the shares of the deceased.
In some instances, key person insurance may be a requirement by a financial institution or creditor. If you are trying to get a business loan and need collateral, having key person insurance may allow you to get the funds you need by putting a lien on the insurance policy. This is referred to as collateral assignment. With key person insurance, the payout of the policy is designed to give the executive time to locate a new person to step into the leadership role or implement other strategies that could help the business continue running smoothly.
How Does Key Person Insurance Work?
With key person insurance, a company purchases life insurance policies on its key employees. The company pays the premiums for these policies and acts as the beneficiary. If the person(s) named in the policy passes away unexpectedly, the company receives a payoff from the insurance company. The insurance proceeds can then be used to cover a wide range of expenses, such as the cost to replace the deceased person, pay off debts or investors, or provide severance pay to employees if the business decides to close down.
Who Needs Key Person Insurance?
Not sure if you need key person insurance? Look closely at your business structure and the people who are involved with running it. As the business owner, you are likely considered a key person. However, there may be other key persons who you rely on heavily. If your company is a sole proprietorship, you are the only employee, and there are no other people that depend on your business, key person insurance is usually not necessary. However, if you have a spouse or children who require your income to live, having adequate life insurance is critical.
How Much Coverage Should Be Purchased
How much key person insurance coverage your business needs will depend on a number of factors. Start by determining what financial effect the death of a key person in your business would have. For example, if you have a larger company in the field of sales and are considering providing key person insurance on an employee, consider the cost to replace that person’s sales income. If you are a sole proprietor and are considering purchasing key person insurance for yourself, you will want to determine how much coverage you will need to financially help your heirs.
Are There Any Insurance Policy Exclusions?
When shopping for key person insurance, carefully read through the policies to determine what is covered and what is not. There is certain policy exclusions that you will want to consider as your claim can be denied if you meet the exclusions. Some of the most common exclusions include fraud, intentional dishonesty, fraud, and suicide within contestability period. This contestability period occurs within the first two years of every life insurance policy.
What Is the Purpose of Key Person Insurance?
While there are many reasons to acquire key person insurance for your business, the most important involves the continuation of your company. If the key person of a business passes away, your business may be forced to close. Having a payout from the insurance company could keep the business afloat as you decide the best strategies to continue operation. In addition, failure to acquire key person insurance could leave your loved ones without the funds they need to live if the key person should pass. This is especially important in one-job households that rely solely on the income from the business to survive.
How Can I Apply for Key Person Insurance?
As key person insurance should be customized for each business, it is important to know what coverage options and features are available to you. When applying for key person insurance, you may want to consider higher coverage limits and terms. With just a small increase in your premium, you can usually gain a significant increase in your coverage limit. Even if you are on a budget, do not settle for the cheapest policy. If you decide you want to renew later, you could end up paying more because the key person is now older.
It is important to realize that your coverage limits may need to change as your business grows. If you have a small startup company, a $100,000 policy may be adequate at the moment. However, if you grow your business into something much more substantial, you may need to increase the value of the key person significantly. Failure to grow and adapt with your business could result in your family not receiving as much money as they need after you pass. For more information about key person insurance or to obtain a policy, contact the business consultants at BBG Broker.