Key Person Life Insurance (also known as Key Man Insurance) is a life insurance policy purchased by a company on a key employee such as the owner, partner(s), majority shareholders or another person(s) whom the continued successful operation of the business depends on. The policy protects the company in the event of their unexpected death. Separate key person life policies are purchased for each key employee. The company pays the premium and is the beneficiary of the policy.
Who needs it?
Most organizations, who have employees who would be extremely difficult, time-consuming or expensive to replace, can benefit from Key Person Life Insurance. The sudden death of key employees such as central decision makers, chief executives, vital sales managers, employees or highly skilled individuals with unique training makes it hard for the business to survive or may result in severe financial loss.
How does it work?
An employer purchases life insurance for the employee through an agent, such as Wallace Welch and Willingham, Inc. (W3). The employer is the owner of the policy, pays the premium and is the beneficiary. If the individual dies, the tax-free death benefit is paid to the employer. The insurance payoff helps the company survive the blow of losing a person who makes the business work. It can be spent towards finding, hiring and training a replacement employee, replacing lost revenue or anything else the company needs during the transition time. The policy can be transferred to the departing individual as a retirement benefit or to a different key employee upon retirement. It can also be used to buy out the key employee’s shares or interest in the company.
What are your next steps?
Look at your business and think about who is irreplaceable in the short run. Think about how the business would be affected if that employee was no longer there. Then think about how much money your business would need to survive until it could replace the key person, get them up to speed and get the business back on track. You want a policy that will satisfy your short-term cash needs yet fit your budget. A business continuity plan should be drawn up to outline how the business would function with the loss of these key employees.
Contact Abbey J. Bowersox at W3 to discuss products and design a plan for your business – 727.522.7777 ext. 150 or firstname.lastname@example.org.