Key person insurance may be an important investment, particularly in a small business in which a key person or persons are crucial to the enterprise’s continued success. With this type of coverage, the company purchases a policy on the life of a key employee. In the event of an accident or illness that takes a key person’s life, the company, as the beneficiary, receives the proceeds of the policy.
Replacing a key person can be expensive and time consuming, and cause a business to lose valuable clients. Key person insurance can help ensure the continuity of the business and help cover financial losses that may occur due to the death of a key person.
Business owners should take several factors into consideration when obtaining key person insurance:
Does your company need key person insurance protection?
That can depend on the nature and size of your business. While many large corporations have a number of experienced executives who could step in and take up the slack if a key person was lost, a small business may fall apart completely without certain irreplaceable personnel.
Which employees should the company insure?
To answer this question, consider your business and who is irreplaceable in the short run. This would be anyone crucial to the business, whose absence could sink the company. Key persons may include founders, proprietors, partners, or key employees.
How much key person insurance do you need?
The amount of coverage you need will depend on your business, but as a general rule of thumb, it would be wise to purchase as much as you can afford. Ask for quotes on different policies: $100,000, $250,000, $500,000, $750,000, and $1,000,000 – and compare the costs. Also consider the amount of money your business would need to survive after the loss of a key person, until a replacement was found and the business recovered from that loss.
How much value could key person insurance add to your business?
A key person insurance policy is a business asset with value for the company. Having this type of policy in place lowers risk for the business and could therefore make it easier to obtain bank financing, credit, or capital from investors. Key person insurance is often required if your company goes public. Taking out a key person insurance policy can help strengthen the relationship with a key employee and promote retention, as it makes a definitive statement about that employee’s worth to the company. If the policy includes a cash value, it may be possible to withdraw funds or take a loan against the insurance policy when a company needs cash.
Assistance with Key Person Insurance for Your Business
There is a lot to consider in procuring key person insurance for your business, and our agents are here to help. We can meet with you at your convenience – regular business hours, after hours, or on weekends. Contact us at Lowdermilk & Associates in Greenwood Village, Colorado to discuss putting key person insurance in place.