Key Facts About Key Person Life Insurance
Now is when most businesses are crunching numbers and evaluating fourth-quarter metrics closely to determine how strong the year will finish out and how hard to push during the first-quarter kickoff. One area of planning, however, might need to be noticed during all the excitement and celebrations of holiday bonuses, performance review results, and end-of-year vacations. One of the more essential types of insurance a company can consider is key person life insurance. With planning and reflection on the calendar, it’s the perfect time to take a step back and consider the pros of having it, especially if your company has an executive, board member, or founder who holds the “keys” to future success.
What is key person life insurance, and why might you consider it for your business?
Key person life insurance is life insurance for a specific person within your company who the business relies on for success. Of course, we know small businesses rely on every employee to a degree. Still, this type of policy is for someone nearly irreplaceable for the company to continue being successful. This type of policy tends to be helpful to small businesses as these types of companies are often passed down to beneficiaries or family members of the owners. Two other significant ways this policy would help a business: helping to keep the business afloat while employees and executives pick up the work of the key person who passed. Or by helping to “wind down” operations while the company closes in the coming months after a key person’s death.
Who pays for this life insurance policy?
You might think that the key person would pay the premiums because this is a life insurance policy. However, since this is life insurance built specifically for a key business person, the business pays for the policy, not the individual. Therefore, you can consider it as life insurance for your business, with the payout benefitting the company and those left behind. Our agents are happy to help you decide how much coverage you need based on several factors, including salary, replacement costs, and other expenses to be considered when securing these policies.
Is death the only way to receive a payout?
Actually, no. Even though this is a life insurance policy, some key person insurance policies will pay out even if the key person is diagnosed with a terminal illness or suffers from a disease that makes them unable to work. For example, suppose a key person at the business was diagnosed with a terminal illness. In that case, the company could receive the payout, giving everyone time to emotionally and financially cope with the situation and decide how the business will move forward. No matter what happens, the company will also face costs like legal fees for attorneys who help decipher business documents, potential marketing expenses with press releases, and the “wind down” expenses that come with laying a business to rest along with the key person. Having some financial backup during this challenging time will remove potential added stressors when the business needs it most.
In case you missed it: Check out “What You Need to Know About D&O” to learn how to protect your board of directors.