A company will purchase key person insurance on the life of an owner, a senior executive, or another important person. The company pays the premiums and is the policy's beneficiary. The terms "key man (or "keyman") insurance," "key woman insurance," and "business life insurance" are also used to describe this type of life insurance.
KEY LESSONS
A key person insurance policy is a life insurance policy that a business purchases on the life of a senior executive or another important person.
If the loss of that person would be catastrophic for the company's future, insurance of this kind is required.
The owner or founder of a small business may be the key figure.
If the insured person passes away, the company will be the beneficiary of the insurance policy.
Knowledge of Key Person Insurance
Key person insurance provides a financial safety net if the sudden loss of a specific employee would seriously impairs the business's operations. The death benefit essentially buys the business some time to find a replacement or to implement other plans to keep (or close) the company.
The owner, the founders, or perhaps one or two key employees are frequently the most important individuals in small businesses. If the person's absence would seriously harm the company's finances, that is the main criterion for qualification. If so, key person insurance is unquestionably something to think about.
Key person insurance is available as disability coverage in addition to life insurance in case the person becomes disabled and is unable to work.
The Key Person Insurance Process
For key person insurance, a business buys a life insurance policy on a specific employee or employee, pays the premiums, and is the policy's beneficiary. The death benefit of the policy is paid to the company in the event of the person's passing.
You can use that cash to pay for the expenses associated with finding, hiring, and training a replacement for the deceased person. If the business decides it can no longer operate, it can use the funds to settle debts, give investors their money back, pay severance benefits to workers, and shut down the company lawfully. Key person insurance gives the business alternatives besides declaring bankruptcy right away.
Company executives must think about who is irreplaceable in the short term to decide whether a business needs this kind of coverage. The owner of a small business typically handles the majority of tasks, including bookkeeping, employee management, dealing with important clients, etc. With this person, the company might continue.
Loss Categories Key Person Insurance coverage
A business can be protected against a variety of risks with key person insurance. For instance, it might offer:
Insurance to safeguard profits, such as compensating lost income from missed sales or losses brought on by the postponement or cancellation of any business project involving a crucial individual.
insurance intended to safeguard partnership or shareholder interests. Typically, this allows the surviving partners or shareholders to buy the deceased person's financial interests.
Insurance for anyone involved in securing commercial loans or banking infrastructure. The insurance coverage's value is set up to be equal to the guarantee's value.
Key Person Insurance Cost
The size, nature, and function of the business, as well as the role of the key person, will determine how much insurance a company needs. It is valuable to request quotes for policies worth $100,000, $250,000, $500,000, $750,000, and $1 million and compare the prices of each.
Whether the business purchases a term life insurance policy or a permanent life insurance policy will also affect the price. Term life is almost always considerably less expensive.
Like most other types of life insurance, the cost of the protection will also vary depending on the age and general health of the insured.
For a 50-year-old male in good health, one major insurer would currently charge $107 per month for a $500,000, 20-year term policy. The cost would increase to $190 per month if the coverage were increased to $1 million.
