Why Key Person Insurance Coverage Is Essential For a Small Business?
Key person insurance, also known as key man insurance, is a specialized type of business insurance. However, there is no hard and fast legal definition for the phrase. In general, however, key man refers to someone who holds a dominant share in a business or other entity. He may hold shares by inheritance, purchase of shares through a company, or even as a borrower on a loan. He may also be the head of a corporation or sole proprietorship. In some cases, he can be a person related to the owner, such as a partner, employee, or apprentice.
Many different types of businesses use key person insurance to protect themselves against exposure to personal liability. The primary reason is that they don’t want their key executives to be held responsible if their negligence has caused harm or death to a customer or client. The secondary reason is that they don’t want to lose control over their firm because it has been the basis for a large loss in the past. While many smaller businesses have fewer than one key executive, large corporations have dozens. For this reason, they find it necessary to ensure all key people against liability.
In order for key person insurance policies to work in small businesses, there are several things that must be in place. First, the insurer must identify the people who make up the risk. They must know that each individual poses a unique risk to the business. Second, they must assess the financial impact of exposure to personal liability in terms of both premiums and possible losses and determine whether the company purchases these key person insurance policies or not.
Because they do not have the time to do so, many small business owners rely on life insurance companies to provide them with key person insurance policies. Life insurance for business owners provides them with the protection they need to protect their key people from personal liability lawsuits. Life insurance for life insurance policies provide critical coverage in the event of the death of any key employee of a small business.
Another thing that life insurance companies take into consideration when purchasing key person insurance policies for small businesses is the age and health at the time of death of the policyholder. Insurance companies determine the appropriate age of an employee based on their experience and the risk of death for that specific employee. If an employee is young and healthy, a small life insurance policy may not be required. However, an older and sick employee can certainly expect a higher premium.
When a life insurance policy is purchased, the proceeds are typically held in a trust. The purpose of this is to provide the beneficiary with the opportunity to pay off the policy without involving the policyholder. Once the proceeds are divided among the beneficiary, the balance of the policy becomes due and payable. Because the proceeds from a key person insurance policy are usually paid out immediately, most beneficiaries choose to receive their benefit immediately. For this reason, a key person insurance policy for a small business is extremely important.
There are many ways that key people in a business could die. Any number of things could happen, such as an accident or natural causes. Regardless of the cause of death, if the business owner has a dependent, he or she would need insurance coverage to cover the loss of income and other expenses associated with the death. Key person insurance coverage can quickly pay for funeral expenses and other expenses that would occur if the business owner died suddenly.
Because the life of a small business owner changes so much throughout the year, it is important to purchase key person insurance coverage to ensure financial protection for family and employees. It only takes one life event for an owner to die to make sure that his or her loved ones are not left suffering because they are not able to work. In the United States, it is not uncommon for wrongful death suits to be filed against a business owner for the death of an employee. The main obstacle to protecting a small business owner’s family is to determine the validity of the claim prior to making any purchases. This means that the buyer of a policy must be able to show that he or she would be personally entitled to the funds that are due after a death occurs.