Business owners spend a significant amount of time building up their enterprises. Sometimes, the immediate needs of running the company can make it difficult to find the time to think about the future. However, strategic planning is crucial to the long-term survival of the organization.
What Is Key Person Life Insurance?
Simply put, Key Person Life Insurance is a policy on an important person within the organization. It might be your top sales person or the person with advanced technical skills. In any case, it’s someone who is vital to the company and without whom the business may not survive.
How Does It Work?
A company buys a life insurance policy on the key employee. The company is responsible for paying the premiums and is also named as the beneficiary of the policy. When the employee dies, the company gets the death benefit. The proceeds of the policy can be used to hire a replacement person. If the deceased employee was one who generated revenue, the money from the policy could cover some of the lost income. If the business would not be able to operate without this lost employee, the company could use the funds to pay off debts, pay other employees, distribute funds to investors or otherwise close the business down.
What Key Person Life Insurance Isn’t
Key Person Life Insurance isn’t a replacement for personal life insurance that would benefit the deceased’s family members. If you are a sole proprietor, you will still need to purchase a personal life insurance policy to provide a benefit for your family both to replace lost income and to cover your final expenses.
It also won’t help in the case of disability. If your key person becomes disabled and unable to work, yet does not die, a life insurance benefit will be of little use. A key person disability policy could help protect in this scenario. Similarly, if you are the sole proprietor but cannot work, a personal disability policy would help to maintain your financial stability.
Where to Start?
You already know you need key person life insurance coverage. Now you need to determine who your key people are and how much insurance you need. Owners, officers and members of upper management are perfect candidates for key life coverage. In addition, think about the employees who would be difficult or impossible to replace because they are highly skilled or have a specific expertise the business depends on and those who generate significant revenue for the organization.
You also need to understand what your business is worth and the financial value of those employees. Start-ups may wish to review their business plan to help point them to this information. Consult with an accountant and be sure to involve the accountant annually as businesses can change over time. Your trusted insurance agent can also help determine the coverage that is right for you.
Key Person Life Insurance can also be an essential part of a buy/sell agreement, which is a legally binding contract that outlines what happens if an owner of a business dies. We’ll cover this topic in more detail at another time.
The best part is that you don’t have to go it alone. Here at New Agency Partners, we have the carrier relationships to provide you with the help you need. Our carrier partner can provide the following valuable services:
- Accelerated Underwriting – In many cases, clients can often get up to $1 million of coverage with just a phone interview.
- No Charge Business Valuation Service – Knowing what your business is worth is essential to knowing how to protect it. One of our trusted carriers can provide you a business valuation at no cost.
- Complimentary Buy/Sell Review – Already have a buy/sell agreement in place? Great! When was the last time you reviewed it? Let us help make sure your needs are still being met.
Planning for the future is just as important to a business’s long term success as maintaining efficient and profitable day-to-day operations. Failure to consider the ramifications of the loss of a key player in an organization can have far reaching effects, including the ultimate demise of the business. Don’t let that happen to you. A little planning today will lessen the pain of the loss of a key person in your organization.