Small businesses and large corporations can have lots of employees, and they are all important to the functioning of the business. However, there are generally a handful of workers, referred to as a key person, that are integral to the business’s daily operations. To put it simply, without them, the business could not function at its highest capacity.
Key people are those employees that are major decision-makers or producers – those employees with knowledge or skill that is not possible to be replaced, at least not easily or quickly. If something unforeseen should happen to a key employee, the business could suffer losses and even close. There is insurance available, however, to protect against the untimely death of a key person.
The tragic helicopter accident in January 2020 that claimed the lives of Kobe Bryant, his daughter, and 7 others is an example of the need for key person insurance. It is not just the Lakers and sports fans mourning his loss – Kobe started a business empire, now with more than $2 billion in assets, with many projects and investments tied to him. His business ventures have clearly benefited from being associated with Kobe and his Black Mamba brand. The accident is a sad reminder of the need to have key person insurance.
What Is Key Person Insurance?
Key Person Insurance is life insurance purchased by a business on an employee’s life. It is also sometimes referred to as “keyman insurance,” “key man/woman insurance,” and “business life insurance.” The business pays for the premiums and is the beneficiary of the policy, but the key person covered by the policy must agree to it.
Who Needs Key Person Insurance?
Businesses of any size can benefit from key person insurance. If an employee, owner, or business partner whose unexpected loss would be catastrophic to the business, you may want to consider key person insurance.
Who is considered a key person?
This type of coverage is purchased for a key executive at the company whose loss will result in large-scale losses for the company. It could mean a loss of knowledge, goodwill, and thought leadership if the top person suddenly dies. The company may flounder and even fail in the worst cases. These top decision-makers and executives are the key people that should be considered for Key Person Insurance.
In addition, your business may have individuals in other departments that are critical to the current and future success of your business. Perhaps someone on your sales team brings in more than their fair share of the business or you have a key individual in marketing that has brought your company to the next level. There is no set role or definition for a key person, but it is important to evaluate your own business to understand who would be difficult to replace from a business perspective if they suddenly passed away.
How much key person insurance should I buy?
While this will vary greatly between individuals and businesses, consider the value the key person brings to the company and how long it would take the company to rebound following the loss of this individual. You might factor in sales, patents, or other intellectual property the individual is expected to create. You might also consider formulas developed by life insurance companies to help in deciding the right amount of coverage for your situation.
How do I get key person insurance?
While the coverage is important, and you should consider all your options, shopping for key person insurance does not need to be difficult. The experts at Hometown Life Insurance can help you find the right policy with the right coverage for your specific business needs.
What are the Benefits of Key Person Insurance?
Key person insurance can provide many important benefits to businesses. It can be an easy coverage to overlook, but life is uncertain – things can happen unexpectedly at any time and having insurance helps mitigate the financial aspect of this risk.
Peace of mind
Key person insurance is an important piece of a risk management program, going hand in hand with business interruption and workers’ compensation coverages. Losing a key producer, salesperson, or owner could cause the business to suffer greatly. Knowing there is coverage in place should something happen to a key person allows the business to operate without this worry.
Add business value
Key person insurance can help a small business by adding another layer of protection. Losing the top decision-maker or producer in a small business could threaten the business itself, but showing creditors that key person insurance is in place can offset that risk. This can make the small business a more attractive investment since risk controls are in place, particularly if you are looking to take on partners or sell the business.
Reduce Risk
If something happens to your key executive, the business will face many risks – loss of knowledge and mentorship, vendor relationships, customers, and profits. The key individual may have been moving the company forward toward a new project or goal, and that momentum is lost with the individual. This pause or slowdown in operations will cost money, so having key person insurance reduces these financial effects by providing funds while the company restabilizes following the loss of the key person.
Tax Implications
Premiums paid on a key person insurance policy taken out by a company on the life of an employee are not usually considered tax-deductible expenses if the company names itself as the beneficiary. This is because the company is considered to benefit from the policy, so premiums are not deductible. Some of the interest paid or accrued may be deductible, however. This gets complicated, but tax implications should be considered when buying key person insurance.
Now that you know more about key person insurance, contact the experts at Hometown Life Insurance to get started. Our licensed professionals will be happy to answer any questions you have.
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