Most companies have a person(s) whose skills are vital to the success of the business. A key person may be an owner, partner, or employee without whom your business would suffer serious consequences, whether that be a loss of credit, loss of key accounts, diminished earnings, unexpected replacement costs, or even the loss of remaining employee’s confidence in the future of the company. Ultimately, every business will be in this position sooner or later, due to a death, disability, or a key employee deciding to leave the company.
Why Permanent Life Insurance?
From modest family operations to multi-billion dollar corporations, the death of a key person can seriously cripple the stability of a business. With life insurance, the business can use the death benefit proceeds to cover the expense of hiring and training a replacement. If the key person becomes disabled or leaves the company, the policy’s accumulated cash value could provide a source of income or money to find a replacement. Often, a key person is also an owner of the company. If an owner were to die, a life insurance policy can help to protect remaining owners from a forced sale or loss of control of the business. Life insurance can be a cost-efficient, relatively simple solution, and the proceeds are generally tax-free.
Who Can Benefit?
Purchasing key person insurance helps to protect business owners from shouldering the financial burden of replacing the deceased employee. Depending on how much the key person’s contribution is worth to the business, it can be expensive and difficult to compensate that kind of loss to company operations. Surviving owners may have to borrow the funds necessary to hire and train a replacement at expensive interest rates, which could damage the business. It could mean liquidating business capital still needed by the business, which could also have negative effects. Sometimes, borrowing isn’t an option at all – especially when the stability of the company is in question. Surviving owners could be forced to use their personal property such as a home or car as collateral on a private loan. And ultimately, if none of these risky options work, the business could lose the confidence of outside investors, customers, and employee’s.
How It Works:
It’s simple. The key person applies for life insurance coverage and gets approved for a policy. The business purchases the policy on the key employee’s life, pays the premiums, and is the beneficiary of the policy. If the key employee dies while the policy is still in force, the company receives the death benefit proceeds to help cover financial losses resulting from the employee’s death. These financial losses could include:
Loss of managerial skill and experience
Decrease in sales
Adverse effects on production
Restrictions on credit to the company
Expense of recruiting and training a replacement
Any accumulated cash value of the insurance policy can also be used while the key employee is still alive. If, for example, the employee becomes disabled, is terminated, or leaves the company voluntarily, the owner of the policy (the business) could use the cash value to help with the financial impact of the situation.
Placing a dollar value on a key employee’s worth to a company can be difficult for clients. There are many things to consider, like the employee’s current salary, net business profits directly attributed to the key employee, and the employee’s future value to the company.
Did You Know?: As you will hear in the video below, key person insurance may be required by any banks with whom you are receiving loans from. And keep in mind, the amount of time it would take to find a replacement key person for the business, if the unthinkable happens.
The Harrin Group offers free, comparative quotes on key person/employee insurance plans from multiple insurance carriers so you can get the best possible rate.
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