This is a term that is so new and fresh to a number of people but key person life insurance policy is an insurance policy that provides death benefit to a business if its owner or another significant employee passes away.
In small businesses, such key persons are normally the owners or co founders of the business. These key persons are normally those who are responsible for the majority of the major profit in the company.
Key Person Life Insurance Policy covers very key people who are crucial to the business and without them the business is incapable of moving forward or thriving.
The purpose of key person insurance is to help the company survive the blow of losing the person who makes the business work. When the employer purchases life insurance of these individuals then there is indeed a chance for the business to continue.
How does the key person life insurance work?
The main aim of the Key Person Insurance Policy is to actually compensate the business from losses that are incurred when a key income generator is lost so that the business may continue.
The policy is actually on the person who is key to the organization such that the organization cannot do without him or her. This person becomes the owner or the beneficiary of the insurance coverage.
In the event that this person dies, then the company will receive death benefit which can be used to keep the business running.
How does the key person life insurance protect a business?
One thing to note is the fact that life insurance coverage is issued on the business key person gives the company access to funds that helps to protect and keep the business running smoothly.
Benefits such as claim can be used as a cost that will be used for the recruitment purposes of rather for a replacement. When death of a key person takes place, especially one that is covered by the policy, the firm is guaranteed of an access to funds that will help replace any revenue that may have been lost.
How much is enough?
It’s very difficult to determine. Here are some guidelines that may help:
- Replacement Value: Coverage could equal the amount needed to recruit and train a suitable replacement.
- Business Life Value: Coverage could equal the loss of annual earnings multiplied by the number of years the employee would have worked until retirement.
- Multiple of Salary: Coverage could equal the employee’s annual salary, times the number of years a newly hired replacement might take to reach a similar skill level.
- Contribution to Profits: Coverage could equal the amount of income lost due to the loss of the key employee.
What is the cost for key person life insurance policy?
There are a few things to consider when determining the amount of key person life insurance to purchase. A good business should think about how much it would cost to replace a key person in the company and how long it would take to train a new person.
They should also be able to look at the revenue that will be lost during the replacement process and how much revenue the key person had brought in for the business.
Your company should also consider a buyout agreement that clearly outlines what happens if the cofounder of the business dies. This serves as an agreement with the partners and shareholders.
When you are considering the key life insurance buyout agreement then make sure that you have an agreement with your accountants and legal counsel.
Let no one lie to you, key person life insurance is the best way to protect your business after the loss of a key person and should be strongly considered when your business is developing and growing.