A key person insurance represents life insurance on a key employee, proprietor or partner on whom the business depends. When it comes to a small business, the key person insurance is the owner. However, the owner may also choose one or two key employees or some founders.
Keith Lowe is an investor and founder in several companies in various industries. He is an experienced entrepreneur, also being the co-founder and officer for the Alabama Information Technology Association. He explains that a small business which is still under development can take up a lot of your time when you need to hire people, get your products ready, pay the bills, and try to raise the salaries of your employees.
Therefore, you should consider all the important things you need to cover in the beginning. Lowe also indicates that key person insurance is one of them. This type of insurance is basically life insurance on the key person in business.
How it works
Keith Lowe explains that a company usually buys a life insurance policy on the key employee and it pays the premiums. Then, the company becomes the beneficiary of the policy. If the key man insurance dies, then the company gets the insurance payoff. This coverage is extremely important since the death of a key man in a company may have terrible consequences on the success of that business.
Therefore, the main purpose of key person insurance is to boost the company’s development, helping it to survive after losing a person who used to make the business work. Until a replacement person is found, the company can use the insurance to pay expenses. Furthermore, they can use the money to pay severance to employees, close the business down in an appropriate way, and pay off debts.
Who needs the insurance
Gabriel Rakower who is an Insurance Representative at Transamerica Agency Network also shares his view. When determining who needs the insurance, he claims that you need to determine what employee is irreplaceable in the short term. Usually, the founder is the one who holds the company together. The founder is the one who manages the employees and the key customers.
If you are wondering how much key man insurance you may need, it is best to get as much as you can afford. First, make sure you gather enough info about the key person insurance from different life insurance agents. Make sure to ask for a term insurance. You should know that most agents would try to offer you variable or whole life. They might have higher commissions and higher premiums, and you won’t need this for a key person policy.
Just try to figure out how much money your business would need until it can replace the key person. In this way, you will help the company get back on its feet. Also, make sure that the policy does not surpass your budget.
The key person insurance will help you save your business when the most important person in the company is gone. Until you find a replacement, you will be able to keep it all together, doing your best to motivate your employees and to satisfy your customers at the same time.
Image Source: Paradigm Life