Key person insurance
Key person insurance is a life insurance which a company buys on the life of a key executive of the company. The company is the beneficiary of the plan and is responsible for the monthly contribution of the premiums in the policy. This type of life insurance is also known as "Men's" or "Women's" key or business life insurance.
"Key Person" insurance is a life insurance policy that a corporation purchases on the lives of its top executives.
Such insurance is necessary if the executive's death or inability to work would be devastating to the future of the company.
For small businesses, the key person may be the owner or founder, and in some cases the only person capable of running the business
The company pays the insurance, pays the premiums, and is the beneficiary of the policy in the event of the person's death or disability.
Understanding the insurance for a "Key Person"
"Key Person" insurance is needed if the unexpected loss of a key executive would have a major negative effect on the company's operations. The payment that comes from the death of said executive essentially buys time for the company to find a new executive or implement other strategies that save the business.
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In a small business, the key person is usually the owner, the founders, or perhaps one or two key employees. The main scoring point would be whether the person's absence would sink the company. If this is the case, key person insurance is definitely worth considering.
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*Key person insurance is particularly a consideration for small businesses, which often rely on a founder or owner for functionality.*
To determine if a company needs this type of coverage, company executives must consider who is irreplaceable in the short term. In many small businesses, it is the owner who does most of the things: keep books, manage employees and handle key customers, etc. Without this person, the business would stop.
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For key person insurance policies, a company purchases a life insurance policy for its key employees, pays the premiums, and is the beneficiary of the policy. In the event of death, the company receives the insurance payment. These funds can be used for expenses until you can find a replacement, pay off debts, distribute money to investors, pay employee severance, and close the business in an orderly manner. In a tragic situation, key person insurance gives a business some options other than immediate bankruptcy.
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The amount of insurance needed depends on the business, but in general, a business should buy as much as it can afford. Companies should request quotes for $100,000, $250,000, $500,000, $750,000 and $1 million policies, and compare the costs of each.
