Does Your Business Need Key Person Insurance?
If you are a business owner, take a moment and think about the people that work for you. Think about What would happen to the daily operations or profit of your business if a key employee suddenly died?
What would happen to your business? Would it come to a crashing halt or major slowdown? Do you have a plan in case of the sudden death of a key employee. For many businesses, this loss would be catastrophic to the company’s profitability or survival.
If you don’t have a contingency plan to protect your business, then you should consider a Key Person life insurance policy.
What is Key Person Life Insurance?
Key person or key man insurance is Company-Owned Life Insurance (COLI) on an employee who provides a substantial role in the success of a business. A policy can be purchased on the owner, a business partner, a sales manager or anyone who makes a significant contribution to the firm.
Key person insurance is a life insurance policy that is purchased on the life of an essential employee. Instead of the death benefit or proceeds going to a spouse, child, partner or trust, it pays directly to the company or corporation.
The death benefit can provide cash flow while the company looks for a replacement or can be used to pay off debts, reassure your investors or even give compensation to employees who need to take on the extra work load of the deceased person.
In short, the company decides what to do with the funds in the best interest of keeping the company running and profitable.
Here’s How Key Man Life Insurance Works:
A company buys a life insurance policy on the key employee and the company becomes the beneficiary of the policy. The company also pays the premium but the premium payments are NOT tax-deductible in accordance to IRS regulations.
If that key person dies unexpectedly, the company receives the insurance proceeds tax free, usually within a matter of days. The reason this type of insurance is so important is because it helps the company survive the loss of the person who makes the business function. Key person insurance gives the company some options other than immediate bankruptcy.
What type of Key Man Life Insurance Should You choose?
When it comes to choosing the right type of coverage it’s not always easy. Many factors come into play such as amount of coverage, how long is coverage needed and what is the budget for the business? Sometimes it just makes sense to choose affordable term life. However, term is temporary coverage and if the business needs are long term, whole life or permanent coverage might be the better option.
Term Life Insurance:
The most affordable life insurance option will be term life. Term life comes in various term lengths and the premium and amount of coverage are fixed for the duration of the policy. Term life is available for 10,15,20, 25 and even 30 years. However once the term is over, the policy ends. Obtaining a new policy could mean having the employee go through the underwriting process again and sometimes, people cannot qualify due to health issues.
There are also no medical exam policies if your key employee does not wish to take an exam. This is a viable option but is generally more expensive than a fully underwritten policy. There several insurance companies that we represent that will offer up to $500,000 without a medical exam. Call us at 800-514-3513 for a quote.
Permanent Life Insurance:
There are 2 types of Permanent life insurance: Whole and Universal Life
Whole life insurance builds cash value and is long term coverage. As long as premiums are paid, the policy will stay in force for the lifetime of the insured. A major benefit of cash value life insurance for a business is an option to access the cash value as a tax free policy loan. This gives a business liquidity if funds are needed in a hurry. It can also gives an incentive for your key employee to stay with your company until his or her policy has fully vested.
Universal Life Insurance:
Universal life is part of the permanent insurance family and works very similar to whole life insurance. The major difference is that the premiums are lower, flexible and the focus is more on insurance protection than the build up of cash value. Policy options are: Guaranteed Universal Life, Indexed Universal Life and Variable Universal Life.
How Much Key Person Insurance Does a Business Need?
The answer to that question mostly depends on your business, profits, operating costs, cash flow and etc. In general, you should get as much insurance as you can afford. Buy term insurance because if your business needs are short term. For instance, if your employee is 50 years old and will retire at the age of 65, a 15 or 20 year policy would be best. Shop around and get rates from several different agents.
Most agents will sell you a key man policy, but setting it properly is another story. Make sure the agent is specialized in business insurance.
As an independent life insurance agency agent we can help by providing sound advice to help you find quality coverage without breaking your small business budget. You can compare term life quotes by giving us a call at 800-514-3513.