While many people envy CEOs and corporate heads, it’s worth pointing out that these high-level executives tend to age fast and die earlier. If the success of your company seems to rely on the talent of a few talented people then you might want to consider getting key person insurance (also known as key man insurance).
This is a kind of life insurance policy that’s used by big and small businesses.
But what is key person insurance? And what should you look for when choosing a policy? Keep on reading and we’ll take you through everything that you’re going to want to know!
What Is Key Person Insurance?
Key person insurance is a business insurance policy that’s bought by a company to insure the life of one of the company’s workers. It’s meant to help the business recover from the death of a worker who contributes greatly to the company.
An employer might choose to insure highly visible workers, executives, and top salespeople.
Similar to other life insurance policies, key person insurance has three main players. First, the owner is the person or company who buys the policy and pays the premiums. This entity has the ability to change, sell, or transfer the policy.
The insured is the person upon whose death the policy would pay out the benefit.
Lastly, there is the beneficiary. This is the person or company who received the benefit if the insured person dies while they are being covered.
As you might be able to tell, the company is both the owner and beneficiary when it comes to key person insurance. Of course, the owner needs to tell the insured that they’ll be taking out a policy in their name and get their permission to buy the policy.
Look for the Types of Key Person Life Insurance Available
Any kind of life insurance policy can be structured to fit a key person life insurance policy. This includes either of the two main categories for life insurance.
You can get key person life insurance as a form of permanent life insurance or term life insurance.
When it comes to term life insurance, you are going to get coverage for a certain amount of time, such as ten or twenty years. This is going to cost you a lot less than permanent life insurance.
If the employee is old or has a set retirement date then you can use this kind of policy and set an expiration date.
If you have a young executive who intends to stay with the company indefinitely then you might want to take out permanent life insurance. You’ll get coverage for life and a cash value amount that will grow as time goes on.
The cash value is an asset that the business can use as collateral for a loan. If you go with a mutual insurer then the company might be able to get dividends too.
A permanent key person life insurance policy will gain in value over time. You can sell the policy in a life insurance settlement if the company decides that they don’t want the coverage anymore.
Look for How Much Insurance Coverage You Can Get
If the company is borrowing money then the lender might want a certain amount of key person coverage. Otherwise, the amount of coverage that you’re going to want to get is going to depend on your business and the specific key person.
You want to buy enough insurance so that the value of losing the employee will be close to zero. To do this, you’ll have to consider the profit and revenue that is due to that employee. You’ll also need to think about the cost to replace that worker, the company’s cost structure, and the soft skills that you’re losing when the employee dies.
Depending on which person you want to cover, the calculation for how much coverage you need is going to vary greatly. It might be fairly easy to figure out how much coverage you need for a salesperson but likely much harder for a popular CEO.
Evaluate the Costs
When you’re shopping for insurance providers, you want to go with a company that is affordable and reliable, such as Shelter Bay Financial Corp (https://shelterbay.ca/key-person-insurance/).
Some factors that might affect the cost of your insurance policy will depend on the health and lifestyle of the employee, the policy death benefit, and the kind of policy.
If you are insurance a worker who’s not healthy or old, then you’re going to pay a relatively high amount for the policy. You might not even be able to find coverage at all if the person is really unhealthy.
If this is the case, then you’ll have to look into other alternatives, such as a loan. It’s also important that your company has a succession plan in place if you have key employees with serious health problems.
Find the Key Person Insurance Policy That Works for You
You wouldn’t run a company without having the proper business insurance place. And you likely don’t want to run a company that could lose a significant amount of value if one of your key employees dies.
After reading the above article, you should now have a better idea of what to look for in a key person insurance policy so that your company can stay protected.
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