WHY YOUR BUSINESS NEEDS KEY PERSON INSURANCE

When it comes to running a business, there are always risks that need to be addressed. One of the most significant risks, especially to small and medium-size businesses, is the possibility of losing a key executive, employee, or owner. If the business is not prepared, this can be a catastrophic blow. During this disruption that follows the death, disability, or critical illness of a key player several things are likely to happen within the business:

• The business will suffer from the loss of knowledge, expertise, and management capability.
• Lenders may cut back on credit.
• Creditors may press for immediate payment of outstanding debt.
• Debtors may delay making payments.
• Employees and customers may lose confidence in the business.
• Competitors may take advantage of the unfortunate business situation.

This is where Key Person Insurance can help a great deal. The company owns the plan and is the beneficiary of the proceeds.

What is Key Person Insurance?

Key person insurance, also known as ‘Key Man Insurance,’ is a life insurance policy taken out on a key employee or owner of a business. In the event of the key person’s death (or sometimes disability or critical illness), the policy pays out a lump sum to the company. This can cover expenses for new recruitment, settle debts, or provide a safety net during a difficult transition period.

Who Is a Key Person?

There are no specific rules for who a business considers a key person. It is an owner or employee that provides a direct contribution to the company’s bottom line. They may also be a key man in their operations. People to consider when purchasing a key man insurance policy include:

• Engineers
• Difficult to replace personnel
• Heads of product development
• Leading sales personnel
• C-suite executives such as a CEO or COO
• Partners or co-owners of a firm

You may want to write down the names of your employees, what they do, and how their loss would impact the company. This review will provide information on who you need to purchase key man insurance policies for.

Why is Key Person Insurance Important?

Like any insurance policy, the goal is to protect the business from the unexpected. The ultimate goal of this policy is to protect a business from the financial consequences of unexpectedly losing a key employee or owner. Here are a few reasons why key person insurance is critically important for a business.

Financial Security

As mentioned earlier, financial protection is the most important aspect of key person insurance. It protects the business against the unexpected economic consequences of losing a key person.

Business Continuity

The loss of a key person can disrupt daily operations. The support from this insurance ensures that the business continues to operate and meet its obligations.

Creditworthiness

Some lenders require key person insurance as a condition for loans if the business’s success heavily depends on the key person. This insurance helps the business continue its access to funding and maintain its creditworthiness.

Attracting Investors

Investors may view a business with key person insurance as more stable and reliable as the company has already taken steps to mitigate unexpected risks.

Succession Planning

The business can use the proceeds from key person insurance to buy out the shares of the deceased (or disabled) key person. Thus, it can be important for an unexpected ownership or succession transition to be successful.

Deciding if Key Person Insurance is Right for Your Business

Key person insurance is an important tool to protect your business from the financial impact of losing a key executive, employee or owner. Without it, your business could be left vulnerable to a range of detrimental factors. Key person insurance policy premiums are based on a variety of factors:

• The policy term (period of coverage)
• Level of benefits (the higher the death benefit, the higher the cost)
• Life assured’s overall health including age, medical history, and family health history.
• Employee’s lifestyle including hobbies, occupation, and driving record.

How do I start?

Have questions about whether adding key person insurance to your business’s insurance is needed? Let Assurein assist you in making Key Person insurance part of your business succession plan!