No one likes to think of it, but if the last few years taught us anything it’s that no one is too young, too healthy, too strong, too careful to avoid death. Hopefully you have already thought about purchasing a life insurance policy on yourself for your family’s benefit, but have you thought about protecting your business in the event of the loss of a key person?
A “key person” is someone whose value to the business is so strong that if they were gone, there would be an immediate financial impact on the business. Maybe it’s the bookkeeper that has been managing your books for twenty years and without this person, it would take months to understand the technology, how the accounts receivables are organized, the terms of the accounts payable that save you the most money, and how to handle payroll for your salary, hourly, and independent contractors. Yes, you could find someone to replace this key person, but while you are looking, and training, your company is going to lose money.
“Key Person” insurance is a type of life insurance policy taken out on an employee whose loss would create a financial loss to your company. The business is the policy owner, the business pays the premiums, and in the event of the key employee’s death, the benefits of the policy are paid to the company so that the financial impact of that employee’s death is softened while the company tries to fill the void.
What if you’re the only employee? You would be the key employee and the insurance benefits would help your family pay off any debts the business had at the time of your death as well as give your family time to make the decision to move on with the business or to let it go. This would be especially significant if you are operating as a sole proprietor since the business debts are now your family’s debts.
A key person insurance policy doesn’t have to be expensive. It is generally a term policy (which are the less expensive life insurance policies) and you can choose the amount as well as the term. You could purchase a five year policy with a benefit of $50,000 and that would be enough for your company to manage until the key employee has been replaced and the new person is up to speed.
By identifying and protecting its key people, a business can reduce the risk of disruption and ensure its continued success. If you’re a sole proprietor, key people insurance will lessen the financial impact of your death on your family so that they don’t have to handle the financial strain of your business debt while they are dealing with the grief of losing you.
These are examples intended to help explain the coverage issue. All claims will be evaluated by the carrier for final determination.
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