What Is Key Person Life Insurance?
Key person life insurance (also called business life insurance) is a life insurance policy taken out on the life of a business owner, and if necessary business partner.
As a small business grows, key person life insurance might also be acquired for other essential employees whose death would cause severe disruption in the business.
Keep in mind that key person life insurance is different than group life insurance which can provide modest coverage to all employees.
How Can Key Person Life Insurance Help A Business?
Purchasing key person life insurance helps to protect business owners from shouldering the financial burden of replacing a deceased employee. Depending on how much the key person’s contribution is worth to the business, it can be expensive and difficult to compensate for that kind of loss to company operations.
Surviving owners may have to borrow the funds necessary to hire and train a replacement at expensive interest rates, which could damage the business.
It could mean liquidating business capital still needed by the business, which could also have negative effects. Sometimes, borrowing isn’t an option at all-especially when the stability of the company is in question.
Surviving owners could be forced to use their personal property such as home or cars as collateral for a private loan. And ultimately, if none of those risky options work, the business could lose the confidence of outside investors, customers and employees.
Almost on a daily basis we are reading stories about a small business is struggling after the death of a key executive.
Although key person life insurance is still vastly underused as a tool to protect businesses, we are starting to see more companies open up to the idea of placing this coverage on employees.
How Does Key Person Life Work?
It’s simple. The business purchases a policy on a key employee’s life, pays the premiums, and is the beneficiary of the policy. If the key employee dies while the policy is in force the company receives the death benefit proceeds.
These proceeds help cover the financial losses resulting from the employees death.
Here’s an example of how key person life coverage works:
ABC, Inc. is an established company listed as an S-Corporation that provides IT services to small and medium size business. Joe founded the company 10 years ago and has grown the original staff of three employees to over 40.
As the company has grown over the years, additional leadership has emerged to meet the demands of its customers. Sally has been the lead on a number of programs that play a big role in the company’s future success.
Not only has she proven her ability to get new offices running smoothly, but she’s also responsible for maintaining ABC’s employee training programs.
Aware of the value Sally adds to the company, Joe considers how the business would survive without her. Joe consults with his insurance agent about protecting the business by purchasing a key person life insurance policy on Sally’s life.
Part of Sally’s job entails launching new store locations. In the event of Sally’s death a delayed store launch could cost the company $200,000- $400,000. A key person coverage amount of $400,000 would eliminate this loss.
How To Choose Between Term and Whole Life Coverage?
Both term and whole life insurance(also called “permanent” insurance) can offer protection for a small business and its owners. Whether a term policy or whole life policy is best for your business depends on a number of factors. This is particularly important if you need insurance temporarily or for an indefinite period.
Term insurance is often the solution for a young company. Lost-cost premiums and a limited term of coverage are usually best for the needs of the business owner.
Guaranteed level premium term has premiums that remain fixed for a period of 10 or 20 years, for example. The annual premium will not change during this period.
Whole life insurance can be used as your business grows or if you find that you’ll need life insurance for an indefinite period of time. A whole life policy provides a lifetime of coverage at the same annual premium. It also builds cash value that can be used to fund needed capital or expansion.
The cash value can also provide the basis for a retirement plan. This is particularly important if the business can’t be sold for a large sum of money, which is often the case.
Choosing between term insurance and whole life insurance is not necessarily an either/or decision. Many business owners decide that a combination of term insurance and whole life best meet the needs of their family and business.
How Do I Find The Best Rates For Key Person Life Insurance?
We recommend using an independent broker like us who is experienced and knowledgeable in designing policies to fit almost any need for key person life insurance coverage.
An independent agent will have access to many more carriers than a captive agent. We personally negotiate with the insurance company underwriters to get you the absolute best rating class no matter the health history or lifestyle history.
You can contact us at 1-888-393-9003 or firstname.lastname@example.org