Business owners need various types of insurance policies to ensure the smooth running of their businesses. Key person insurance is one such policy that is bought on the life of the key person or a critical member of your business, without whom your company would get into financial trouble or face other serious consequences. The company acts as the beneficiary and would receive the benefits upon the death of the insured person.
The money can be used to replace the member or cover the business’ operational costs or lost revenue until a replacement is found. The key person can be the owner, partner, executive, technical expert, or any member whose skills are irreplaceable. If your business is dependent on someone’s expertise, network, or financial support so much that their disability, death, or the decision to resign will negatively affect your business’ growth, then key person insurance is for you. Keep reading to learn more about this insurance, who should get it, its benefits, and its cost.
What is Key Person Insurance?
Key person insurance is bought for experts, specialized candidates, and business associates who are the most significant part of the company. The insurance offers financial support to the company and buys it the time needed to find a replacement or plan a new growth strategy so that the business doesn’t have to shut down. Key person insurance makes sense for all sizes and types of businesses, including small businesses.
For a small business, the owner and a couple of employees who have a significant contribution to the business are considered ideal candidates for the policy. The qualification criteria are simple.
Also read: What is Business Interruption Insurance?
If your company can close, experience a financial crisis, or face any other major problem in the absence of a specific employee, you should consider key personal insurance.
Key Personal Insurance Coverage
In most cases, key person insurance covers the death and disability of the insured member.
If the person resigns or leaves the job for any valid reason other than a disability, you can transfer the policy to this person so they can continue paying the premium. Or, you can cancel it altogether. Here are the types of losses the policy covers.
Recover Profit: The insurance covers the income you lose from the cancellation of the project or its delay because of the key person. Any kind of income loss that your business experiences, whether it’s because of a lack of technical expertise or network, will be covered by the policy.
Buyout: key person insurance is also for partners who want to buy the shares of the co-owner if they die. The partners can buy key person insurance on the life of co-owners. If they die, the partners can use the insurance benefit to buy the shares of the deceased.
Covering Operational Expenses: If the key person is the business owner, you might have to close the business down for good if the owner dies. With key person insurance, you will get enough time to not only find the replacement but also cover the operational costs of running the business until the replacement is found. Not only that, but the policy covers the cost of training the new employee and their onboarding.
Sometimes, the key person insurance is used to pay off the debt, reimburse employees, and clear the dues of the investor. That’s usually the case if the owner (key person) dies and the employees and the associates decide to close the business. The insurance benefit can also be used to successfully wind down the company.
How Much Does the Key Person Insurance Cost?
We have already mentioned who qualifies for the key person insurance. The next big question is how do you decide the amount of insurance one should purchase? It depends on the value of the key person, their contribution to your business, and the level of harm that can occur if they die or experience any disability.
It usually starts at $100,000 and can go up to $1 million, but that can vary depending on the insurance provider you choose. The cost also varies depending on whether you choose term life insurance or permanent life insurance. The former is cheaper. Other than that, the cost depends on the key person’s health, age, the type of business you are running, your industry, and so on. It’s best to get quotes from different insurance providers to get the best deal.
Why Should You Consider Key Person Insurance?
Losing a key person can put a company in a financial crisis, i.e. if the company doesn’t wind down. Some members of the organization play a huge role in keeping the business running. These are mostly the business owners, who oversee management, finances, and other business operations. Or, it can be the key investor who puts in a significant amount of money to keep the company afloat. Sometimes, it’s an employee with a special skill that helps the company get maximum projects.
Whoever the key person is, it’s clear that running a business without them can get super challenging. Even if the board decides to close the business, they will still have to pay off the remaining debt and returns to the investors. If the key person dies, their family or the partners of the company will bear the financial burden of clearing the dues. That’s where the key person insurance comes to your rescue. The policy covers the death and disability of the member, ensuring that their death won’t put anyone at financial risk. It also ensures that your company stays afloat no matter what.
However, the insurance is not for every business. If you are running a business with employees who have generalized skills and members who are easily replaceable, you might not need key person insurance.
The key person insurance is bought by the business and the company pays the premium for it. The plan can be canceled if the insured person quits for any reason. However, if they die while they are a part of your business, your company will receive the insurance benefit.