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Home / Beginner’s Guide to Key Person Insurance

Beginner’s Guide to Key Person Insurance

Article originally posted April 4, 2021 on www.insuranceneighbor.com(opens in new tab)

You have devoted your time, creativity, energy, and finances to build a business. The last problem you need is the risk of losing it all if a key member of your team passes away. Key person insurance is a specific type of life insurance that protects a business in this situation. 

What is Key Person Insurance?

Key person insurance pays out death benefits to a business when a member of your business’ team dies. This type of policy should be in place to protect against significant financial losses associated with losing one of the owners, partners, or employees. This type of insurance can be a lifesaver in specific situations:

  • If your business health is based on the name, actions, reputation, or skills of a specific person, key person insurance provides the wherewithal to wrap up the business or make it through the transition following the loss of an owner, partner, or key person.
  • If your business viability is based on the actions of your top salesperson, developer, technician, or another employee, your business could suffer extreme financial losses if that person dies.
  • If your business is a partnership, and one partner dies, key person insurance provides the finances to buy the shares in the company, which usually transfer to the decedent’s spouse or children.

How Does Key Person Insurance Work?

Key person insurance is a life insurance policy, paid by the business, that pays the death benefit to the company upon the death of the named individual. The business owns the policy. The key person in the policy must have agreed in writing before you can purchase key person insurance. The death benefit is paid to the business. It can be used to purchase back company shares owned by the deceased, pay company debt, or provide a financial cushion to cover financial losses.

Should We Buy Key Person Insurance?

If your business viability is based on the name or skills of a specific individual, it is critical that you have key person insurance. Many smaller businesses rely on the skills of one or two individuals. If such a person suddenly dies, your company may be unable to move forward or may require time to find a replacement. The death benefit paid to the business can allow it to survive the transition, pay critical staff, and cover bills.

Partnerships and Key Person Insurance

A partnership can pose specific problems when one partner dies. The stock ownership may transfer to the spouse, who may not be the ideal partner for your business. Key person insurance can allow you to buy the stock and avoid problems.

How Much Key Person Insurance Do You Need?

To determine the amount of key person insurance your business should have, it is advised that you meet with a qualified insurance agent to review your situation. A valuation of how a partner, owner, or key employee impacts your business health will be required, along with the cost of the policy itself and the level of coverage that suits your budget.

Let Our Agency Help

You may want to invest in disability insurance or purchase a key person insurance policy that covers both death and disability. If you are considering key person insurance, our qualified, experienced agent can help you find the right policy for your budget to protect your business. 

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