Key Person Insurance – Is This Enough?
Key person insurance, also known as key man insurance or key person coverage, is a type of business insurance designed to protect the company from risks that the company’s key people may develop. In general, there is no absolute legal definition for “key man insurance.” However, in practice, key man insurance is a type of risk management strategy for small businesses that specifically focuses on the protection of the company’s key employees from events or circumstances that occur beyond the control of the company that could result in those employees losing their jobs.
The key element of this type of risk management strategy is the ability to compensate those employees who are laid off or otherwise terminated from the company. Once the loss of an employee occurs, a business usually must incur expenses to replace those workers. Often, these expenses are passed on to the customers of the business through lower business loans and/or lower business rates. Thus, in the event that key people are lost, key person insurance coverage can help to make certain that these companies do not incur any significant losses in terms of either business loans or lower business rates.
To some, it may seem that having this type of policy means overpaying for the amount of coverage that is provided. However, key person insurance coverage does not provide excessive amounts of protection. For example, it is not uncommon for a small business owner to purchase a life insurance policy that provides approximately forty thousand dollars (in twenty-fifths of a dollar per month) in death benefits. This amount is more than most small business owners actually need to cover the loss of one of their employees to the tune of several thousand dollars per month. Moreover, the premium payments required by a life insurance policy can be quite affordable for a small business owner.
It should be noted that this amount is only an estimate of how much money the business owner will receive if the employee dies. Therefore, it is not an accurate representation of how much money a small business owner will lose in case an employee dies. Because of this, key person insurance should not be seen as a means of achieving excessive financial protection. Rather, it is seen as being a necessary safeguard to prevent the loss of life coverage for an extremely small cost.
In the event that one of a small business owner’s key employees dies, the surviving spouse will be required to pay the entire difference between the premiums on the life insurance policy and the cash death benefit. In most cases, this will involve taking out a loan from the business owner’s personal bank. The loan will be secured by the property held by the business. A typical small business owner may have up to seventy-five percent equity in his or her company.
It may also be required for an employee to take out a life insurance policy with the business in order to provide his or her family with monetary help. The employee will need to be informed of this requirement prior to taking out the policy. The best way to do this is by informing key people in the company. One can simply include these individuals in all communications with the company. In addition, keeping these individuals in the loop about the exact terms and conditions regarding the life insurance policy will help protect them as well. This will help prevent them from experiencing unforeseen circumstances that could cause them financial distress.
As one continues to manage the business, he or she may want to look into purchasing key person insurance to help protect him or her against company debts. For example, it may be possible to buy up enough coverage so that the business owner is protected in the event that the principal dies. If the company is able to keep its business going without him or her, the death of the principal may force him or her to sell the company and liquidate its assets.
While key person insurance is an excellent option for protecting an entrepreneur, there are also other important benefits. For instance, permanent life insurance policies provide benefits to a business owner and his or her family. For that reason, they are a better choice for someone who is planning to retire. They will continue to be protected and can cash in if the business owner is not around to cash in. In addition, by investing in permanent life insurance policies, the business owner may also have peace of mind knowing that they are financially protected in case something unexpected occurs.