A way for businesses—especially niche businesses—to address a major risk.
Who are the people most crucial to your
business?
Have you taken steps to insure them?
At every company, there are certain people who are essential to day-to-day operations. If they die, the business may face an operational or financial crisis.
Key person insurance is designed to help businesses deal with this circumstance. Its payout can offer some monetary relief so that operations can continue running smoothly.
Companies purchase key person insurance for a variety of
reasons.
They realize that the insurance benefit could help them
settle outstanding loans or pay for the recruitment and training of
a new hire. Additionally, the policy may play a role in an
ownership transition or an executive compensation plan. If a key
person dies, the business may even want to provide their spouse or
family with the equivalent of their salary for a time.
How easily can this coverage be arranged? Quite easily. In fact, any type of term or permanent life insurance policy can be structured as key person insurance. Most companies buy on price and opt for term coverage, but permanent coverage can be offered as an employee benefit, which can eventually be transferred to the insured party—a nice perk for retirement.1
Key person insurance is constructed so that the company is both the policy owner and beneficiary. (It is alternately known as corporate-owned life insurance, or COLI.) As a first step, an insurer provides an acknowledgement and consent form that the business must use to le gally notify the key person of its intent to buy such coverage. This form explains the coverage, and the key person must sign it before the policy can be bought.1
A good key person insurance policy should have flexible
terms.
It should give your business the option to raise or lower policy
limits. In the case of a permanent policy, your firm should have
the liberty to change which person is insured.1
Premium payments on a key person insurance policy are usually not tax deductible, but the policy payout is commonly tax free. There are no tax consequences for the insured person unless they are named as the policy beneficiary or become its owner.1
Key person insurance may also boost your standing as you
seek financing.
If you apply for a business loan, you will be asked if
your company has key person insurance. If it does not, the loan may
not be forthcoming. Key person insurance is often a prerequisite
for loans guaranteed through the Small Business Administration
(SBA).1
Niche businesses arguably need this coverage the
most.
A software development firm, a biomedical company or any
kind of business where the owner or employees must have
"expert" knowledge of a discipline or an industry; these
are the businesses that may be most at risk should a key employee
die.
Is your company without key person
insurance?
While insuring a company's information, equipment, and
inventory against loss is par for the course, insuring a business
against the loss of human and creative capital is not. A loss of
knowledge and mastery can spell the end for a small business that
has transitioned from survival to success. Look into key person
coverage today, for you never know what tomorrow may hold.
Footnote
1 - valuepenguin.com/life-insurance/key-man-insurance [5/8/19]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
