Last editedJun 20212 min read
Business insurance comes in all shapes and sizes, but you also need to consider the people behind your business. Is one person the absolute cornerstone of your company? Then you might want to consider key person insurance, which helps protect against the financial impact that losing a key employee can cause.
What does key person insurance do?
Key person insurance is intended to protect a business from the possibility of a key employee dying. It’s also known as key person life insurance. The key person must be someone whose death would be devastating to the company, not just emotionally, but financially, and throw the company’s future into question.
Key person life insurance helps protect the business and keep it stable despite the loss of a key stakeholder. Through the death benefit of the policy, a company can guard against its overall business value dropping while also covering the cost associated with hiring someone else to fill the role.
Who would be covered by key person insurance?
Key person insurance covers individuals who are pivotal to the health and future of the company. This could be a business owner, founder, or top executive. For small businesses, this person is usually the owner. Key person insurance is intended to offer a financial cushion against the fallout of this key person’s untimely death, but it’s not intended to cover the long-term consequences of this person’s absence. That means it’s there to protect the company while they search for a replacement.
How is key person insurance different to regular life insurance?
Unlike standard life insurance, which is usually paid to family, friends, or charity, key person insurance sets the company itself as the beneficiary. The company takes out the policy on the chosen person and pays the premiums. Should the person then pass away, the company, not a person, receives the policy death benefit.
Key person insurance can also be purchased to cover a certain period of time. This means a small business can cover its owner, but as it grows and the owner’s responsibilities become more evenly spread, the cover may no longer be deemed suitable.
How can companies spend key person life insurance?
The payout made by insurance can be used to guard against bankruptcy and any financial hardship that may arise when a key person has been lost. The funds can be used in several ways – for example, to source and hire a replacement, cover loan payments, or cover the loss of profits. If the company feels it is not possible to continue without the key person, the money can also be used to shut down operations as smoothly as possible, paying off debts and closing the business.
What is key person disability insurance?
Key person disability insurance works similarly to key person insurance, but protects against the prospect of a key person becoming disabled, rather than passing away. Key person disability insurance pays benefits to the company. The insurance payment can be used in the same way as key person life insurance. The person who is insured does not have to have become disabled through a work-related incident. It’s possible to have both types of insurance in place for a key member of a business.
Does my business need key person insurance?
Depending on the value a person can bring to your company, you may want to consider key person insurance. Take a look at your finances to decide if any individual poses a significant financial loss were they to pass away. Insurance payouts come in a variety of sizes, from $250,000 to $1 million, so shop around and look for premiums that work for your business while also providing you with an all-important safety net.
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