Can your business stay afloat without its most valuable employees? Without key person life insurance, this is a difficult feat. We delve into the benefits of key person life insurance here.

What is key person life insurance?

This is a life insurance policy that a company can purchase on the life of its most valuable employees or top executives. With these policies, the business has two roles, 1) the business is the owner of the policy and responsible for paying the premiums, and 2) the beneficiary of the policy benefits in the event of a Key Person Death.

In the event of a “key person” death, the business can utilize the proceeds to cover the costs associated with recruiting, hiring, and training a replacement of the former employee. Additionally, the proceeds can be used to pay off debts and in some cases, allows the business to repurchase shares from the deceased employee’s family.

What is key person disability insurance?

Key person disability insurance is structurally similar in that the business is the owner and beneficiary of the policy and its benefits. However, the risk covered is very different. Instead of covering a Key Person’s death, it would cover the risk of a key person’s incapacitation due to illness or injury.

Who is considered a key person?

Here are examples of employees to consider:

• Founders
• Business owners
• Someone in a highly specialized role
• High Revenue Producing Employees

These “key” employees who would be costly and difficult to replace and whose absence could have deep and long-lasting impact to the entire company.

Additionally sole proprietors can also opt for key person insurance as a safety net for family members who could end up inheriting the business.

How much key person insurance do you need?

The, “how much do I need” scenario varies business to business. A good place to start is analyzing how much it would cost to replace the key person. Factor in the person’s contribution to the company’s bottom line, their current salary, what percentage of the company they may own, or the cost of replacing a uniquely specialized role. There are varying ways of calculating amount of Death Benefit needed in your Key Person Policy. It is common that a business would look at its employee’s salary, and multiply that salary by 5-10. I would suggest speaking with your agent/advisor to see if that methodology works best for your company’s need.

Term vs. permanent- Which one do I choose?

Term: Term insurance is generally more cost friendly for a business. Under a term policy, premiums are level for the specified time period – which is typically 10, 20 or 30 years.

Permanent: Under a permanent policy, the business also receives a death benefit. With permanent insurance, the policy may accumulate cash value as premiums are paid, therefore providing some flexibility to utilize the policy cash as an added benefit. Additionally, Permanent Insurance while generally, more expensive, usually offers more customization in policy structure, premiums, and added benefits.

Wondering how to get started with a key person insurance policy? We can help. Contact us.