What’s Key Person Insurance?

While all employees play a role in the success and progression of a business, certain individuals have a key role. More often than not, their presence and knowledge not only keep the company steady, but further help it move forward.
What if that individual – a CEO, COO, partner, proprietor or long-time department head – were to suddenly pass away or become disabled? As a protective measure for general and financial needs, consider key person insurance.
A type of life insurance policy, key person helps ensure the continued success of the business by making the company the direct beneficiary. How does this work and how does it benefit your company?
The Basics
Key person is ideal for companies of all sizes – especially small businesses – and works like all other life insurance policies, except the business entity is the beneficiary. In this case, your business takes out the policy on its most essential workers and pays the premiums. If one of those individuals dies, your business then receives the death benefit. Until you find a replacement or adjust your operations, this holds you over through the transition.
Understand that key person cannot be used as a personal policy. Particularly, the death benefit cannot go to children, spouses or other dependents relying on the essential employee’s income. To cover both bases, recommend your employee take out a personal life insurance policy to reduce any financial hardship his or her family could experience.
How Key Person Helps Your Business
Having these funds available can assist with:

• Any expenses related to finding a replacement employee, including recruitment and training.
• Improving your company’s commercial credit.
• Paying off debts.
• Paying severance to employees.
• Closing the business without resorting to bankruptcy.
• Distributing money to investors.

Selecting a Policy
Generally, term insurance – as opposed to whole or variable – is a better option. As well, think about how long it will take to replace the key employee and how much money your business will need over that period. In the process, consider taking out a policy anywhere from $100,000 to $1 million, depending on what fits into your immediate budget and will address your short-term cash needs during such an emergency.
Does your business rely on a key group of individuals that, should one pass, will disrupt your stability? As a backup and preemptive solution, take out a key person policy for your business. To discuss further or get a quote, give us a call at 203.439.2815.