What is key person life insurance?
Key person insurance is a special policy that companies or businesses can buy that insures the life of the owner or an employee that is essential to the business. It is also called key man insurance, key woman or business life insurance. The point of key person insurance is to provide some protection for the company. Policies are taken out on important employees or leaders to ensure the company doesn’t experience a financial loss if the individual passes away. The loss of an owner or essential employee in the company can cause significant troubles for a business. Having key person or business life insurance helps the company weather the change. It can give the organization extra time to develop a strategy or to find a suitable replacement.
Some of the circumstances that key person insurance can protect against include:
- Profits – the policy funds can help offset any revenue loss from reduced production or sales. It can also be beneficial to protect against loss due to the cancellation or disruption to projects that involved the key person.
- Shareholders – Key person insurance can also protect investors from loss. A policy can also define how shareholders or partners can purchase the shares of the key person.
- Guarantees – Sometimes businesses have someone guarantee a loan for the company. Key person insurance can provide protection for that individual.
How does key person life insurance work?
Unlike other types of life insurance policies, with key person insurance, a business will buy the policy and they will be named the beneficiary. The company makes the premium payments and is paid the death benefit when the insured employee passes away. The funds that are paid to the company can be used to cover the costs of recruiting a replacement for the deceased employee.
It can also be used to keep the company in production while a new leader is found. However, if the business cannot find a replacement or the plan is to shut down, the death benefit funds can be used to cover any debts, taxes, or bills. The money can also cover the cost of severance for other employees, pay investors, and ensure the company does not go bankrupt.
It’s vital for businesses to identify those people or positions that are vital to their operations. If the loss of an employee would lead to financial troubles, buying a key person insurance policy can be beneficial. Additionally, you can use key person insurance to benefit your business in other ways. One could be to use the insurance policy as collateral for a loan. Permanent life insurance policies have an investment component. This can help your business save up money for future costs. You can even access the cash value of the policy to help cover business expenses.
Types of key person insurance
Key person term life insurance
Key person whole life insurance
Variable life key person insurance
Disability key person insurance
Who needs key person insurance?
Key person insurance offers a level of protection for a company. While any organization can benefit from a key person insurance, small businesses have the most to gain. Many small businesses run with just a handful of people. And, while each person is important to the company, the loss of some key individuals would be detrimental to the business. This is often the owner of the small business and one or two employees who multi-task to keep things running.
You can determine who fits into key person qualifications by considering what would happen to the company if that person were gone. If the business would suffer financially as a result of the loss, you should buy key person insurance for that individual. Key person insurance is a good fit for those individuals who have specialized knowledge, a strong reputation that financially benefits your business or employees who bring in significant revenue to your business.
This type of insurance can also benefit small business partners. While there is no key person in this circumstance, it can help a partner buy the shares of their deceased partner and keep the business running. It’s also important to note that some banks require you to have key person insurance as protection before they’ll approve your loan application. This protects the banks’ money and reassures them that the loan will be paid back. Investors may request you have key person insurance too.
How much does key person insurance cost?
How much key person insurance is needed?
- Replacement costs – determine how much it would cost to recruit a replacement for your key employee. Include advertising costs and training costs. You can also include how much revenue your business will lose during this time.
- Earnings – calculate how much revenue your key person brings to your business by working out how much they contribute to your earnings each year. Then multiply that number by how many years it will take to recoup the lost earnings if they pass away.
- Multiple of compensation – another business cost to consider is performance-based compensation. This means that it can cost your business profit while the replacement gets up-to-speed and reaches the same level of competency as the key person who is gone.
What happens when the key person insured leaves their job?
- Surrender the policy, which means the company cancels the coverage and stops all premium payments.
- Sell the policy, the key person may wish to buy the policy from the company.
Where can you buy key person insurance?
Other insurance policies for businesses
- General liability. This protects you if someone gets hurt on your premises or if there is property damage.
- Professional liability insurance. The insurance policies are directed at professionals like lawyers. If a client is unhappy with the advice or service, your professional liability insurance can help cover legal costs.
- Product liability insurance. If your company produces a product, this insurance policy can protect you if your product somehow injuries a customer or damages property.
- Workers’ compensation. You can protect yourself in case one of your employees gets injured on the job.
- Equipment insurance. If your business uses heavy and expensive machinery, equipment insurance protects you against theft or loss of your machines.
Why Shelter Bay?
At Shelter Bay, we have over 200 years of collective experience in the insurance industry. Our team of insurance specialists has access to hundreds of life insurance policies. We can help you find the best key person insurance policy for your business. As insurance brokers, we’re not bound to sell life insurance products from any particular insurance company. That means you can trust us to have your company’s interest in mind.
If you’re thinking of buy a key person life insurance policy, contact Shelter Bay and let us help you protect the business you’ve built.