If you own a business, what would happen to your company if suddenly you weren’t there?
For people who own or operate businesses, it’s likely that there are at least one more key people who are relied on, without whom the company may not survive. In most cases, those people are either the company owners, partners, or individuals who work in an executive or upper management role.
Key employees are an important part of a businesses’ success – and because of this, many companies must consider how much of an impact the business would sustain if one or more of the key individuals were to pass away suddenly.
In many ways, companies have similar insurance needs as individuals – the need for protection against untimely death, as well as the need for cash by the survivors in order to carry on.
With that in mind, in order to protect a company in the event of the death of one or more of its key people, key person life insurance of oftentimes put in place.
What is Key Person Life Insurance and How Can It Help?
Key person life insurance is technically a strategy where life insurance is put in place in order to protect a business from the loss of a significant employee. In this strategy, the company purchases a life insurance policy on the life of the key person or people. The company is the owner of the life insurance policy, as well as the beneficiary. In most cases, the company also pays the life insurance policy premium.
Should the key employee pass away, the death benefit proceeds from the life insurance policy are paid out to the company. With these proceeds, the company will be able to continue operating during the period of transition when a replacement is being found for the key employee who was lost.
These death benefit dollars may also be used by the business to implement additional types of strategies to save the business when the key person or persons are gone.
What Type of Coverage Can Be Used?
When a business purchases key person life insurance, the policies that are used may be either term or permanent. A term life insurance policy will provide the business with pure life insurance death benefit coverage, whereas a permanent life insurance policy will accumulate cash over the life of the plan.
Although the use of a term life insurance policy will allow the business to pay a lower premium than that of a comparable permanent plan, a term policy will need to be renewed on a regular basis. As the insured gets older – and may also contract various health issues over time – a term life insurance policy may become cost prohibitive at some point in the future.
A permanent life insurance policy that is used for key person insurance may have a higher premium initially. However, these types of life insurance plans typically build up a cash value inside of the policy.
In addition, the premium amount is usually locked in throughout the life of the policy – and, unless the policy holder stops paying the premium, the coverage cannot be cancelled by the insurance company.
Other Benefits to Having Key Person Life Insurance Coverage
In addition to the death benefit proceeds, there are other positive features of key person life insurance that may be used by a business. For example, should the business decide on permanent life insurance coverage for the key employee, then the cash value of the policy may be considered an asset to the company. In addition, this cash value is able to grow on a tax deferred basis, and may also be used by the company should it need funds for other company related needs.
A company that has key person life insurance also benefits by offering security to their customers and investors. Many individuals who do business with companies as customers or stockholders will only proceed if the company in question has implemented a key person life insurance strategy. This is because the customer or investor would not want to lose money if a key person passed away and the company was to suffer great losses.
Still another advantage of key person life insurance has to do with the family members of the key person. This is because in many cases the family of the key person may receive funds to assist with burial costs and other types of final expenses.
What is the Best Type of Key Person Life Insurance to Obtain?
There is no one best option when it comes to the purchase of key person insurance by a business. The type of plan that is chosen will really depend upon the size of the company as well as how much in death benefit proceeds will be needed. In addition, a business may or may not have a need for the cash value component of a permanent life insurance policy.
Choosing the best strategy can be difficult on your own – that’s why it’s best to talk to an expert. We can help you in determining which type of coverage may be best for your specific situation. Talk to us – we work with more than 40 life insurance carriers, and can find you the policy, and the premium, that works the best for you.
Brad Cummins is an independent life insurance agent and owner of Local Life Agents, one of the nation’s leading independent insurance agencies, offering life insurance products in all 50 states. Learn more about Local Life Agents at www.locallifeagents.com. Follow Local Life Agents on Twitter @LocalLifeAgent.
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