Why You Should Have Key Person Life Insurance
Think of the one person in your company who you rely on every single day. Maybe this person always has the answer to the company’s biggest struggles, or perhaps they bring in a bulk of the business’s income. Now imagine your business without that person. If the possibility is a scary one to consider, you may need key person insurance.
While you may be grieving the loss of this important person, this type of coverage gives you the peace of mind that your company will survive should something unexpected occur. There are several reasons you should consider investing in coverage, but let’s start with the fundamentals.
The Basics of Key Person Insurance
A key person policy is a type of life insurance that provides coverage in the event that a company loses its owner or other important employee to death. While the insured party is just one individual, it is the business as a whole that becomes the beneficiary should the person die.
Regardless of the size of the business, benefits from this policy ensure that it can keep moving forward despite a tough loss. For small businesses, financial security is usually dependent on the owner or founder’s contribution. In fact, many lenders require a business to have key person coverage before they will issue a small business loan.
The absence of certain people can greatly impact the stability of large companies as well. Businesses with a higher valuation will likely invest in more coverage.
Many Types of Individuals Can Be Insured
Eligible employees are usually determined by the business itself, but sometimes there are specific requirements a person must meet in order to be considered a key person. Ordinarily, the individual will fall into one of four categories.
- They are an owner or active partner.
Those who have a significant stake in the company’s success often offer the biggest contributions, both financially and operationally. When losing someone this high up in the management structure, a lengthy transition period may follow that could lead the company to struggle financially.
- Their name is a big part of the business’s reputation.
A key person may be identified as someone that customers automatically associate with the business. This could be because their name is in the company’s title, or because they often represent the company to the public.
- They bring in a large portion of the company’s income.
Sales professionals or account managers often secure a company’s business contracts, making them the source for most of the money coming in. Without this key person there to keep existing relationships strong or develop new business relationships, the company may see a drastic loss of income.
- They have a unique skillset the company relies on.
Technology companies, or companies whose product requires advanced knowledge in math or science, are great candidates for this type of insurance. A key individual may have developed the company’s complex product or system, and that person contributes to its continued success and expansion. Losing someone with this technical background can be difficult, if not impossible, to replace. Having coverage allows the company to take the time it needs to replace them.
The Cost Is Low and the Benefit Is High
While you may consider the untimely death of a key employee an unlikely outcome, the benefit of having this coverage outweighs the cost you’ll pay for the policy. The cost of premiums is determined on the basis of three factors: an examination of the insured person, the coverage offered, and the term length of the policy. This allows you to choose options that work best for your financial situation.
When this type of business insurance policy is issued, an underwriting process evaluates the individual being insured to determine the premium the company will pay. The key person will be examined in several important areas:
- Age
- Current health
- Medical history
- Lifestyle choices
- Hobbies/interests
- Risk factor of job
A young employee in good health will usually result in lower premiums, but older employees may allow you to use shorter terms. If a person is expected to retire in the next ten years, it’s unnecessary to pay for a policy that’s good for twenty years.
Full coverage offered can range from $100,000 to over a million, depending on the anticipated loss the company will face in this person’s absence. It is usually calculated based on the yearly income generated by this employee, multiplied by the number of years it’s expected to take to replace them.
Once all these factors are taken into consideration, a monthly premium amount is decided. If your business requires less coverage, you’ll pay a smaller premium. The cost is usually insignificant when compared to the security the coverage provides.
Benefits Can Be Used in a Variety of Ways
In the unfortunate event that a key person in your business dies, this life insurance gives you the ability to prepare for the company’s future without fear of it floundering. Benefits may be used to replace income that is lost, or it can be put towards the recruitment process of finding the key person’s replacement. In extreme cases, where the business is not expected to continue without this key person, benefits can help pay off remaining debts and secure employees who will lose their jobs.
It may also be advantageous to allot a certain percentage to the key person’s family. This gives that employee an incentive to continue with the company, knowing that their family has a small cushion if they were to die unexpectedly.
Income From a Claim May Be Tax-Free
While the premiums you’ll pay for this policy are not tax-deductible, the money you receive if you make a claim is not always considered taxable income. One way to avoid paying taxes on this money is to reach a formal agreement with the insured party, with their knowledge and consent that the policy exists. Ask your agent about specific requirements to take full advantage of this benefit.
Take Action Now
Protect your company and its future by securing key person life insurance now. At Smallwood Insurance, we’re here to ease your worries and give you the security your business needs. Contact us now to get started with your policy.
