Not every investment delivers immediate returns. Sometimes, businesses may have to wait for two, five, or even ten or more years before a decision proves beneficial. Such is the case with a key man life insurance policy. Unfortunately, many business leaders don’t start thinking about things like key person insurance and succession planning until it’s too late. This lack of forethought, though, can create big problems for companies should an essential employee fall ill or unexpectedly die. In order to avoid such a perilous position, today we’ll explain when companies should consider investing in key person insurance. Check it out here:
What is Key Person Insurance?
The first step in purchasing a buy-sell life insurance policy is 2-fold, the legal agreement structure,
Key person insurance is a life and disability insurance policy that a business takes out on an essential team member in order to ensure its own viability. In this setup, the business acts as both the policyholder and the beneficiary. So the business pays the premiums associated with the coverage and receives any of the eventual payouts. In the event a key person should die or become incapacitated, a business could receive compensation for all of the following:
- Cost of hiring temporary personnel.
- Cost of recruiting, training, and hiring a permanent replacement.
- Losses incurred from sales or revenue on time-sensitive projects.
- Losses incurred as a result of a business’s inability to grow.
- Losses incurred by shareholders or partnership interests.
- Overhead costs.
As one might imagine, key person insurance can save businesses huge sums of capital and may — in the right circumstances — prevent a company from going under.
Key person insurance is a life and disability insurance policy that a business takes out on an essential team member in order to ensure its own viability.
Determining Key Person Insurance Need
One of the first things business leaders should do when they begin to plan for the future is to determine whether they need key person insurance, and if they do, how much coverage do they require.
There is no set standard for designating a key person at a business. In general terms, it’s best for businesses to only take out key person insurance policies on individuals who represent great value to the business. A key person might generate a substantial amount of business revenue (over ten percent). Or they might have a series of vital contacts. Or possess skills or talents unique in their field. “Typical” candidates for key person insurance are CEOs, high-ranking managers, business owners themselves, and top sales professionals. Again, though, anyone employed by a business can be designated as a key person. Finally, a business may take out more than one key person insurance policy at a time.
When to Invest in Key Person Insurance
Key person insurance protects the business from losing team members who are nearly irreplaceable. So if there’s anyone at your company who is integral to its continued existence (let alone success), then your business needs key person insurance. What’s more, it’s not a good idea to wait to invest in key person insurance. The unfortunate reality is that businesses can’t plan for accidents and unexpected personal misfortune. Given that fact, the best way to prevent a twist of fate from ruining your business plan is to apply for key person insurance coverage as soon as possible.
At Blue Herring, we have years of experience helping businesses just like yours secure key person insurance and develop excellent succession plans. Through our WayPilot Program, we can help you find the best possible coverage at the best possible price. It’s never too early to start thinking about your business’s future — so contact us here for a quote or use our key person insurance calculator to calculate the level of insurance coverage you need today: