For small businesses that rely on two or three core members to operate, the death of one person could easily mean the demise of the company. Key person insurance is a life insurance policy paid for by the company, for which the company itself is the beneficiary, and can be a deciding factor in determining whether or a business can survive the death of a key player. These policies are commonly taken out on founding members, owners, or individuals whose skills or expertise would be difficult to replace.
Some of the ways this coverage could save your business in the wake of an unexpected death include:
Covering the Expenses of Finding and Training a Replacement
When a key member of a company passes away unexpectedly, it is felt as both a personal and economic loss. Finding and training a suitable replacement in a timely manner can mean the difference between a business going under, or recovering and eventually thriving. The money from the policy can go toward recruitment programs and training hours, to find the most highly qualified candidates and get them up to speed as quickly as possible.
Keeping Operations Running and Replacing Lost Revenue
It is common for a business to experience a downturn following the death of a key person, such as owner or salesperson. At the very least, timelines on existing projects can be thrown off as the company struggles to reassign tasks while also dealing with such a significant change. If the person had specific skills or knowledge that played a key role in the daily operations of the company, business may be temporarily halted while the remaining partners decide on the best route moving forward. In either case, the money paid out on the key person insurance policy can keep the company functioning by covering payroll and other costs.
Buying Out Stocks
If the key person was also a major shareholder in the company, the remaining partners may have the option to use the insurance payout to purchase the stocks back from the decedent’s beneficiaries. This allows control of the company to remain in the hands of those involved in the company’s operations, while also ensuring that the key person’s heirs receive fair compensation.
Resolving Debts
Losing a key person can be devastating to a small business. Unfortunately, some companies are simply unable to come back from such a tragedy, and in the end, cease operations. Without key person insurance, declaring bankruptcy could be the only option. Even if the company will not survive long term, the payout from key person insurance can pay off existing debts, settle accounts, and get its affairs in order before shuttering.
Securing Financial Backing
As with any type of insurance, key person insurance is something we purchase “just in case” but hope to never need to use. Even if your company never experiences the loss of a key member, having this insurance can be a benefit, especially for a young or relatively small company. A new idea with only a few partners and little established history is a big risk for venture capitalists, bank loans, or SBAs, but having the right insurance demonstrates financial planning and provides a layer of security to your investors – who may require this insurance before making a financial commitment.
At Lowdermilk & Associates in Denver, Colorado, we can guide you through the process of putting key person insurance policy in place, and you can count on us to seek out the highest level of protection for your key players for the lowest price – we know it matters.