Mitigating business risks using key person life insurance
Companies like yours have grown by hiring outstanding people contributing to your organization’s overall growth. To varying degrees, the profitability and success of your company depend on you and the key people in your organization. A key person is usually the owner, manager, executive, partner or employee who possesses high-level, growth-driven skills. In their industry, their skills are so valuable that it could take years for the business to train someone to have the same skillset. Sometimes, the skill is so unique that it is entirely irreplaceable in a short time.
A key person life insurance policy aims to help you recruit, hire, and bring this new person “up-to-speed” in your company using the proceeds of a life insurance policy. In addition, it should cover any decrease in sales and profits, in the short term, through this process by using the death benefit of the policy. In a situation where there are several owners in a small business, the life insurance policy can act as business interruption insurance to allow the remaining owners time to deploy a succession strategy. In addition, many lenders or arm’s length investors require the company to carry key-person life insurance. If life insurance is required as a condition of financing, a portion of the premiums may be deductible.
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Advantages of having key person life insurance
- If a key person is also a shareholder, you should look at having life insurance to provide cash to repurchase the shares from the estate of all principal shareholders in the event of their death. This would be in addition to key person insurance as you will still have to replace them.
- If the business is applying for a loan or a loan outstanding, having key person insurance in place would alleviate any concern and provide funds to pay off the bank loan.
- Some key clients, partners or vendors might even be concerned about the well-being of the business and its key people. These concerns are real and could be alleviated by knowing that there was an infusion of cash payout to find a well-qualified person quickly.
Four steps to setting up a key person policy
As an operating business, it must pay insurance premiums on the business property and other assets to protect against the risk of a severe fire or possible liability issue. Well-established businesses know that the business owner, partners, and key people are valuable assets. These individuals can have an unexpected severe illness or even death, likely more than any casualty or property insurance incident. Such an event will affect your bottom line. We urge you to consider setting up at least a key person policy as part of your business risk planning. It is vital to have this risk covered using a corporate-owned insurance policy.
Real-life story and the value of a key person
We had an employer who was importing safety supplies. One employee was responsible for over 50% of the company’s sales due to his time in the industry and experience. The owner estimated that if something were to happen to him, his sales could decrease by 30%, and it would be challenging to replace him without sufficient short-term capital. The owner became aware of the option to set up a key person policy and took action immediately to set one up. Our advisor working with this business owner presented an excellent case and a cover letter to the insurance company supporting the reasons. We put in place a key person policy of over $700,000 of coverage which was far more than twice his salary. Sadly, the key person died in a motorcycle accident a few years later, but the business did survive and continues to thrive today.
Compare key person life insurance quotes online
The quickest and most reliable way to compare key person insurance plans is to get multiple quotes from an online rate comparison service like IDC Insurance. Not only will you be able to compare life insurance quotes from several top-rated companies, but you’ll be able to do so from the comfort of your own office or home. You’re free to do it at your own pace, so you can take however much time you need to feel confident about your decision. Our accredited insurance agents will help guide you through this process and assist you in buying the best key person life insurance for yourself, your business partner or a key person in your company when you’re ready.