Why a Business Owner Needs Key Person Insurance

Many businesses rely heavily on one or two key people to keep the business and its operations running smoothly. When one of those key people in your business become disabled or pass away, this can leave your business in an uncertain financial state. One way to help provide for the financial stability of your business in such a circumstance is to purchase a key person insurance policy (sometimes previously referred to as “key man” insurance).

What is Key Person Insurance?

Key person insurance is essentially a life insurance policy that the company purchases on the life of an individual whom the business heavily relies on. This individual can be an owner or partner, c-suite level individual, or someone who has expertise or specialized knowledge in your industry. The company—and not the key person or their heirs or estate—is the owner and beneficiary of the insurance policy, meaning that the company will receive the insurance proceeds in the event of a covered loss. For that reason, the company (and not the key person) is responsible for paying the premiums for the policy.

Subject to policy terms, conditions, and limitations, key person insurance provides a death benefit payment to the company that owns the policy upon the key person’s death.

What Key Person Insurance Typically Covers

In the event your business experiences a covered loss of the key individual, the business would receive a death benefit. This death benefit is compensation that can be used for other business needs. A key person insurance policy can help your business with:

• Operating expenses until a replacement is found
• Training a replacement hire
• Replacing lost income
• Purchasing a former owner’s stake in the business

Types of Life Insurance

Key person insurance is a type of life insurance, which provides you and your business with the flexibility to choose the type of life insurance policy you may want to acquire for your business. Just like “typical” life insurance policies there are two main types, term and permanent. The following are some of the types of key person insurance that are frequently available. Each type of product may have its own advantages and disadvantages. To learn more, contact one of our experienced agents.

• Term Life Key Person Insurance

 A term life policy provides life insurance coverage for a specified period of time, usually ranging between 10 to 30 years (although other terms may be available depending on the particular policy).  If the key person dies while the policy is still active, and subject to the policy terms and conditions, then the beneficiary will receive the death benefit. If the key person is still alive at the end of the specified period, the policy and its coverage come to an end and no benefit is paid. 

• Whole Life Key Person Insurance

Whole life, also referred to as permanent life, is a life insurance policy that continues as long as the policy premiums are being paid. Unlike a term life policy, there is no specified end date for a whole life policy. So long as the premiums are continuously paid on a timely basis, and subject to the policy terms and conditions, the beneficiary will receive the death benefit regardless of when the key person passes away. Whole life policies also usually include a “cash value” component, in which a certain portion of the policy premiums are allocated towards a cash value account that can accumulate over time.  The policy owner can use the cash value as a source of savings, which they may be able to withdraw or borrow against up to certain limits.

• Variable Life Key Person Insurance

Variable life is similar to whole life, in that there is no set termination date, and the policy continues for so long as the premiums remain paid.  The key difference is that the cash value of a traditional whole life policy is typically placed into a savings like account, whereas the cash value of a variable life policy can usually be placed into investment accounts. Those investments may potentially increase or decrease in value, depending on the market and the success of the investments.

• Disability Key Person Insurance

Disability is an optional selection when looking at key person insurance. This disability policy can provide the company with a benefit payment if the key person experiences a disabling condition or injury and cannot perform their essential duties due to the disability.

Cost of Key Person Insurance

What you might pay per year on key person insurance depends on a variety of factors. Some of these include the types and amounts of coverages that you select, the nature of your business, and the age, gender, and health of the insured. Reach out to your local office to request a quote based on the needs of your business.

What if a Key Person Leaves the Business?

What happens if the insured key person quits, retires, or takes a new job elsewhere? The following are some of the possibilities your business might be able to take. Note that availability of these options may depend on policy terms and conditions and applicable state law. 

1. Surrender the policy
2. Some policies provide “surrender value,” which is a limited amount of money that the insurance company will pay to the policy owner if the policy is voluntarily terminated before a covered loss occurs. Sell the policy to the departing employee
3. Some policies may allow the owner of the policy to transfer ownership of the policy to the departing employee or their new employer. 
4. Some policies may allow the owner of the policy to sell it to a third party, often known as a life settlement provider.

Recap

If your business relies heavily on a few key individuals, you may want to consider key person insurance. There are some common coverages that you may want to consider, including term life, whole life, and variable life options. You’ve worked hard to grow your business – let us help you protect it properly. Give us a call, today!

 

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This article is for general informational purposes only and is not to be relied upon or used for any particular purpose. Cross Insurance shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, insurance, accounting or other professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article are that of its author and do not necessarily represent the views of Cross Financial Corp. and its subsidiaries and affiliates (“Cross Insurance”) or Cross Insurance’s management or shareholders.