It can be disastrous for a business when a key person becomes disabled or dies. Significant amounts of time and money can go into replacing a key person in a business of any size. In a small business, a key person who makes crucial contributions may be irreplaceable.
A knowledgeable agent at Integrity Commercial Insurance Services in Murrieta, California will be happy to advise you on key person insurance. Consider the following in determining if a key person policy should be included in your business insurance package.
Who Is a Key Person?
A key person is a business owner, partner, or employee whose contributions are essential to the business. This could be a top salesperson, a deal maker, or someone with knowledge or skills the loss of which would greatly affect the business. Insurance companies do not consider just any employee as a key person.
How Will a Key Person Policy Protect Your Business?
Key person insurance can be life insurance or disability income insurance. The business is the owner and beneficiary of the policy. The payout on a key person policy can help cover the cost of recruiting, hiring, and training a replacement for the key person and compensate the business for lost income during the transition. If the business is being sold after the loss of a key person, the payout can help cover expenses in the interim.
How Long Should the Term Be on a Key Person Policy?
A term life insurance policy on a key person provides coverage for a certain number of years. This type of policy is usually affordable if the key person is in good health when the policy is purchased. In determining the length of the term, consider how long the key person will be essential to the business, what compensation may be required to replace the key person with someone with comparable skills, and how much it will cost to hire a firm to search for a replacement.
Key person disability insurance policies are typically short-term. If the key person becomes disabled through illness or injury, this type of policy can pay out benefits for anywhere from six months to two years. Key person short-term disability insurance is more costly than key person life insurance because the risk of injury or illness is greater than the risk of death.
Is It Possible to Purchase a Key Person Policy that Benefits Both the Business and the Employee?
A key person policy can be used as an employee benefit in addition to the protection it provides for the business. If you buy a key person whole life policy, the company will be the policyholder and beneficiary, benefitting from that protection. A whole life policy builds cash value that can be provided to the key person at retirement or when leaving the business amicably. Another option is to fund an executive bonus plan with key person life insurance as an incentive for key employees to stay.