If you own a small or medium-sized business, chances are that there is at least one person in your company whose knowledge and expertise are key to the success and profitability of your business. Whether this key person is you, your business partner, a highly skilled employee or your top sales gun, losing this key executive or employee could mean financial disaster for your company. Now, just think what would happen to your business if your key employee or executive died today?
Key person life insurance is designed to cover this contingency. It is a life insurance policy that a business takes out on the life of a key employee or executive, whose premature death could have a significantly negative impact on your business income. The loss of the key person may result in a substantial drop in revenues and profits, a disruption of the projects he or she was involved in, lost business opportunities, as well as increased expenses associated with recruiting and training a replacement. Key person life insurance is purchased to provide protection against these adverse financial consequences.
What Coverage does Key Person Life Insurance Offer?
* In the event of the key person’s death, the policy will pay out a lump sum of money to compensate the business for the resulting loss in revenue and profits.
* It funds the cost in time and money that will be required to find, recruit and train a qualified replacement key employee.
* If the key person is a partner or shareholder, the policy protects the interests of the firm’s surviving partners, by providing funds with which they can buy out the deceased partner’s shares.
* It also protects the interests of investors and creditors. In fact many banks, venture capitalists and other lenders generally require the business to take out key person life insurance, to protect their loans and investments in the business.
What are the Benefits of a Key Person Life Insurance Policy?
* The proceeds from the policy provide the business a financial cushion in the period following the death of a key employee. It enhances the company’s ability to continue profitable operations.
* If the key person retires, the business may surrender the policy for its cash value. Alternatively, it may choose to transfer the policy to the retiree as a retirement benefit
* Having a key person policy generally demonstrates financial stability to investors and creditors, and it may even be used as collateral for a loan
* All insurance premiums paid under the policy are fully tax-deductible as a business expense. The interest on loans borrowed against a key person policy is also tax-deductible.
* It enhances employee loyalty and retention if the policy’s cash value is earmarked to provide retirement income for the key employee, should this employee outlive the policy term.
Who owns the Key Person Life Insurance Policy?
It is owned and controlled by the business, which also pays all the policy premiums. The business is also the beneficiary of the policy, and receives all the insurance proceeds upon the death of the insured employee. The key person’s estate has no insurable interest in the policy, and does not stand to receive any portion of the proceeds from the policy.
Does your Business need Key Person Life Insurance?
To determine whether or not to purchase a key person insurance policy, just think what would happen to your business if your key employee or executive died today. What would you stand to lose in business revenue, goodwill or expertise and experience? What would it cost in time and money to replace this loss? If losing a key person would jeopardize the continued success and profitability of your business, you need to insure against it. If it would have little or no dire effect, you do not need key person life insurance.
The Bottom Line…
Taking out key person life insurance coverage on your most valuable employee or executive can benefit your business both during the key person’s life, and after his or her death. It makes great business sense as a risk management tool, and may one day spell the difference between financial ruin and the continued success of your business.