No matter its size, a business almost always has a core group of people who are vital to daily operations. Often these professionals are in high-ranking positions, serving as CEO or director of a business unit, but occasionally a few key people are scattered throughout an organization. For example, lower-level employees may have years of experience that can’t easily be replaced.
If one of these people should die or become disabled, the business can suffer lost revenue or struggle to stay in operation altogether. Key person insurance is intended to manage this risk, providing businesses with funds to help cope with such traumatic events.
What is Key Person Insurance?
Key person insurance allows a business to take out a policy on an employee whose sudden death or disability would have a dramatic impact on the company’s future.Tweet This The employer usually pays for the coverage and is the sole beneficiary.
Should the employee pass away or become severely disabled under a covered event, the business receives a payout in accordance with the policy. These funds can be used for expenses incurred as the company searches for a qualified candidate to replace the lost employee. If the absence of a key person leads the business to shut down, the proceeds from the policy may be used to offset losses, including paying back investors and providing severance pay to staff.
Choosing Key Person Coverage
If your business is a sole proprietorship, you’ll only have to worry about the loss of income that your own passing would bring to your family. However, once your business begins to grow, it’s important to put measures in place to protect your employees and shareholders in the event that something happens to you or another key person.
When selecting a policy, your business will be presented with several coverage options offered at various premiums. You must balance cost versus risk to determine the proper coverage for your business. One important consideration: whether you want to purchase a whole life, universal, or term insurance policy.
Whole life and universal policies provide coverage along with a savings account. Term coverage, on the other hand, extends protection for a set amount of time and does not accrue value. There are pros and cons to each type of policy, so it’s a good idea to consult with an insurance professional before purchasing a key person policy.
As you search for the right key person insurance plan, consider the cash benefit you’d need to keep your business running in the event of an insured event. Be realistic about what the employee contributes to your earnings, and how the business would have to adjust if they were suddenly lost. Compare insurance companies, as coverage costs can vary.
Key person insurance may be an important protection to put in place for your business. When combined with cross-training and documentation of crucial duties, key person insurance can better protect you against the sudden loss of a vital employee.
If you run a construction business, you may be prone to more risk and liability, especially when it comes to employees being injured or a loss of life. To safeguard your business against lawsuits, you may need multiple types of coverage.
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