Most small businesses have one or two key people who are crucial to the day-to-day operations. These key people frequently are the business owners or founders, and it is their job to manage the books, take care of major clients, hire and fire employees, and stay on top of the sales department. If a key person were to die or become incapacitated, the business would be in serious trouble.
Determine if Your Business Needs Key Person Insurance
It's important to evaluate your business and determine what would happen if a key person were to die. Is there anyone qualified to replace him or her? Would certain aspects of the business be placed in jeopardy due to the loss of this person? Would the business have to shut down if an owner or other key person died? Would the company have to file for bankruptcy? The answers to these questions will help you decide if you need key person insurance on one or more people in your organization. Age should never be a factor in determining if someone should be insured. Make that decision based on the individual's value to the company.
Understanding Key Person Insurance
Your business purchases a life insurance policy on the key person, makes all the premium payments, and is named as the beneficiary. If the key person named on the policy dies, the company receives the insurance payout. This allows the company to keep operating while searching for a replacement. The insurance money can be used to pay bills, purchase supplies, and for multiple other purposes. In the event it is felt the business cannot go on, the insurance payout prevents bankruptcy by making it possible to pay off debts, pay severance to employees, and close the business without causing financial hardship to anyone. It is important to understand that no money from the insurance policy goes to the family of the key person, and the beneficiary company is not required to pay taxes on the payout.
What Should Be the Policy Amount?
For a key person policy, term insurance is the type you want to purchase. There is no need to buy whole or variable life for key person insurance, and they both have higher premiums. Ask for term insurance quotes. After you get price quotes, choose the policy that will fit your budget and keep the company afloat if a tragedy should occur.
Business owners and employees all expect to live a long life, but unfortunately that is not the future for everyone. Protect your business from financial chaos in the event of the tragic death of a key person. Talk to your business insurance agent about a key person policy, and be prepared.