What Is Key Person Insurance?
When an owner, a senior executive, or another significant individual passes away, a business will buy key person insurance on that person's life. The beneficiary of the policy is the company, which also pays the premiums. This kind of life insurance is also referred to as "key man (or "keyman") insurance," "key woman insurance," and "business life insurance."
KEY LEARNINGS
A business will purchase a life insurance policy on the life of a senior executive or another significant individual as a "key person insurance policy."
Such insurance is necessary if the loss of that individual would be catastrophic for the company's future.
A small business's founder or owner could be a crucial figure.
The company will receive the proceeds of the insurance policy if the insured person dies.
familiarity with a key person insurance
When an employee suddenly leaves a job, there is a financial safety net available in the form of key person insurance. Essentially, the death benefit buys the business some time to find a replacement or to put other plans into action to keep (or close) the business.
The most crucial people in small businesses are frequently the owner, the founders, or perhaps one or two key employees. The primary requirement for eligibility is whether the candidate's absence would significantly harm the company's finances. In that case, key person insurance is undoubtedly something to consider.
If the key person becomes disabled and is unable to work, disability insurance is also offered in addition to life insurance.
The Process of Key Person Insurance
For key person insurance, a company purchases a life insurance policy on an individual employee or group of employees, pays the premiums, and designates a beneficiary on the policy. In the event of the person's death, the policy's death benefit is paid to the company.
That money can be used to cover the costs of locating, hiring, and training a replacement for the deceased person. The money can be used to settle debts, reimburse investors for their money, pay severance benefits to employees, and legally close down the business if the company decides it can no longer operate. Key person insurance offers the company alternatives besides immediately filing for bankruptcy.
If a business needs this kind of coverage, executives must consider who is irreplaceable shortly. The majority of duties, such as managing employees, dealing with significant clients, and keeping track of books, are typically handled by the owner of a small business. The business might carry on with this individual.
Key Person Insurance Categories of Losses
Key person insurance can shield a company from a range of dangers. For illustration, it might provide:
Insurance is designed to protect profits by, for example, making up for lost revenue from missed sales or losses brought on by the delay or cancellation of any business project involving a key individual.
insurance designed to protect the interests of shareholders or partnerships. This typically enables the surviving shareholders or partners to acquire the financial interests of the decedent.
Anyone involved in securing business loans or the banking system should have insurance. The value of the insurance coverage is intended to be equal to the value of the guarantee.
Cost of Key Person Insurance
The amount of insurance a company needs will depend on the size, nature, and function of the business as well as the role of the key person. To compare costs, it is beneficial to get quotes for policies worth $100,000, $250,000, $500,000, $750,000, and $1 million.
The cost will also vary depending on whether the company buys term life insurance or permanent life insurance. Term life insurance is typically much less expensive.
The price of the protection will vary according to the insured's age and general health, just like with most other types of life insurance.
One major insurer would currently charge $107 per month for a $500,000, 20-year term policy for a 50-year-old male in good health. If the coverage was increased to $1 million, the price would rise to $190 per month.