Key person insurance is a type of life insurance policy that provides a death benefit to a business if its owner or another significant employee passes away.
A) If the business’ reputation and financial viability are critically linked to the key employee’s name, reputation, or unique skills, the key employee’s death could end the business.
B) If the death of a key employee (like a top salesperson) could quickly threaten the company financially.
C) If a financial institution or other creditor needs collateral for a business loan and requires the option of putting a lien on a key person policy. This is sometimes called a collateral assignment.
D) If the business is a partnership and each partner wants to be able to buy out the other’s shares in case of an untimely death.
There’s no set formula for deciding the monetary value of your key person insurance. You may want to start by considering the financial effects a key employee’s death would have on your company.
For instance, if you’re a sole proprietor buying key person insurance on yourself, you may want enough coverage to help your heirs close your business and pay off any company debts. If you own a larger company and are insuring a key employee, you may need enough coverage to replace that person’s sales income, for example, or to provide a financial cushion while you search for the employee’s replacement.
How your policy is structured may depend on your company’s legal structure. Typically, the company pays premiums for the key person policy, owns it, and is the beneficiary. The key employee must provide consent, in writing, to your company owning the policy.
Suppose you have key people who are irreplaceable or whose contributions are so crucial that without them, your business might fail. In that case, key person insurance can provide the money necessary to recover and rebuild in the event of their premature death. Connect with us to know more!