You have devoted your time, creativity, energy, and finances to build a business. The last problem you need is the risk of losing it all if a key member of your team passes away. Key person insurance is a specific type of life insurance that protects a business in this situation.
Key person insurance pays out death benefits to a business when a member of your business’ team dies. This type of policy should be in place to protect against significant financial losses associated with losing one of the owners, partners, or employees. This type of insurance can be a lifesaver in specific situations:
Key person insurance is a life insurance policy, paid by the business, that pays the death benefit to the company upon the death of the named individual. The business owns the policy. The key person in the policy must have agreed in writing before you can purchase key person insurance. The death benefit is paid to the business. It can be used to purchase back company shares owned by the deceased, pay company debt, or provide a financial cushion to cover financial losses.
If your business viability is based on the name or skills of a specific individual, it is critical that you have key person insurance. Many smaller businesses rely on the skills of one or two individuals. If such a person suddenly dies, your company may be unable to move forward or may require time to find a replacement. The death benefit paid to the business can allow it to survive the transition, pay critical staff, and cover bills.
A partnership can pose specific problems when one partner dies. The stock ownership may transfer to the spouse, who may not be the ideal partner for your business. Key person insurance can allow you to buy the stock and avoid problems.
To determine the amount of key person insurance your business should have, it is advised that you meet with a qualified insurance agent to review your situation. A valuation of how a partner, owner, or key employee impacts your business health will be required, along with the cost of the policy itself and the level of coverage that suits your budget.
You may want to invest in disability insurance or purchase a key person insurance policy that covers both death and disability. If you are considering key person insurance, our qualified, experienced agent can help you find the right policy for your budget to protect your business.