Think about it… every successful business you know has a key person (or persons) in place that can be credited as being a major component of the company’s success. The company can be of any size, from two employees to an infinite number. It doesn’t matter. For a business to be a success there will always be at least one key person in place. Logic dictates that you should find a way to ensure the success of your company by protecting that key person(s). Key person insurance is the answer.
The Balance (www.thebalance.com)) explains key person insurance as:
“Life insurance owned by a business entity on the life of a key individual that will, in the event of his or her death, offset a loss in earnings and provide the funds necessary to find, hire, and develop a replacement. It is designed to offset losses resulting from the death of a key person, such as reduced sales, interruption of a vital research project, flow of production, or an impaired credit standing.”
Key person insurance generally falls into three categories to choose from:
- Term Life
- Permanent Life
- Whole Life
- Universal Life
Before we go any further, it’s important to note that any type of key person insurance doesn’t apply to a sole proprietorship – it’s not to be used as a personal life insurance policy. It does apply to a key employee, owner, partner, manager, etc. It could be anyone that the continued success of your company depends on. In small companies this would most likely be the owner or manager. In all cases, it would be the person(s) whose death or becoming disabled would have a negative impact on the company. Key person insurance sole purpose is to protect the company financially in such a case.
Here’s how it works:
- A company purchases a life insurance policy on their key person(s)
- The company pays the premiums
- The company is the beneficiary of the policy
- The company can use the money to find a replacement person, pay off debts, close the business if necessary, etc.
Once you’ve decided to purchase key person insurance, how do you determine how much coverage to get? Think about how much your company is worth. How much money would it take to continue operations if your key person is suddenly no longer with you? The general rule of thumb is to purchase as much as you can afford to spend on premiums. Talk to your insurance agent and ask for multiple business key person insurance quotes. For example, begin with $100,000 and get quotes in increments of $250,000 up to $1 million. Next step is to sit down and compare the costs related to each quote and then to the amount of money it would take for your company to survive. Since ARCW Insurance represents a variety of insurers, our Pros can shop this for you and present you with a variety of options.
What if your key person is disabled? You may want to consider adding key person disability insurance to the life insurance policy. This will protect you if your key employee is unable to work. You can receive benefits on a monthly basis or as a lump sum. Keep in mind that there is a waiting time for benefits to begin.
By now you’re noticing that there is no “set” standard key person policy. Talk with your business insurance agent and determine exactly what you need and then have a business insurance quote prepared that is tailored to fit your company’s needs.
This information is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. Should you have any questions or would like to discuss your risk exposure with your business insurance, please contact the insurance pros at ARCW Insurance. We are here to help.