Business Insurance Center
Business Insurance Q & As
When most people think of life or disability insurance, they think of these types of policies being purchased by individuals looking life or disability coverage. However, life insurance for business and business disability insurance should be a part of very every commercial insurance portfolio. Designing a life and disability insurance plan around key persons in your company will insulate your business from the catastrophic impact of a sudden loss.
Various Uses of Key Person Life Insurance
The primary purpose of key person life insurance is to provide an insurance payout to the business after the loss of a critical member of the organization. This payout can be used to continue operations, or to wrap up and shut down the company. A key person life insurance policy is a critical part of any small business risk management, and should be added to any commercial policy.
Key person life insurance can be purchased to not only provide an insurance payout upon death of a critical partner, but as a source for loans in the event the company finds itself cash strapped. If the business purchases a cash value policy, they have the added feature of a policy loan. The plan will pay out a death benefit should the key person die, but it can also be borrowed against for business needs at the loan rate specified in the policy. If the key employee survives to retirement, the cash value would then be used to fund a deferred compensation retirement benefit. The key person insurance policy can also be transferred to the employee at retirement as a perk and part of his retirement package.
Only a permanent key person plan will have cash value. A cheaper term policy can be used as key person life insurance providing the same cash compensation in the event of the key employee's death., however, it will not allow for cash value and can not be borrowed against. Term key person plans are more affordable and more flexible, but will not have the cash value option.
Key Person Disability Insurance
Just as with the death of a key employee, there are potentially the same severe consequences of a key person becoming permanently disabled. Key person disability insurance can serve as a safety net for such unexpected events. Business disability insurance proceeds can be used to hire someone to replace a key disabled employee or to fund disability buyout agreements to reorganize the company without the lost partner or wind down operations. Disability insurance for the business can also be used to pay for things such as rent, utilities, inventory, and other monthly costs that the loss of income due to the disability creates a hardship in paying.
A key person disability insurance policy would be purchased , paid for, and owned by the business. In the event of disability, the key person disability insurance benefits would be paid to the company and be used in whatever way the remaining owners determine is best for the organization.
Who Should be Insured by Key Person Insurance?
Apart from the business owners, a key employee would be anyone with expertise in production, sales or any other crucial key areas or roles that under pins the success of the business. Finding someone to replace these individuals with their specific skill set or expertise could take time. A key person insurance policy such as a business disability insurance policy or a life insurance policy for businesses can provide funds that would assist in compensating for the loss in the event of death or an absence in the event of disability.
Determining how much key person insurance to purchase takes just a little calculating. Take into consideration the following things to consider when deciding how much key person insurance to purchase:
- How much the employee is paid in salary
- Estimate the company's earnings that are traceable to the that key employee
- Estimate the reduction of value of the business that would occur due to the loss of that key employee
- What the business can afford to pay in insurance premiums
Key person insurance provides needed funds, and should be included in any business insurance policy. By having the appropriate legal documents executed (such as a buy sell agreement) that will outline how the benefit money should be used, key person insurance can be a funding mechanism to allow for a smooth transition after the loss of a critical contributor to the organization.