Is your dependent on one person? Many businesses require an entire team to operate smoothly, but some entities can rely on a single individual to ensure operations continue. If your organization is more of the latter, it is important to understand what Key Person Life Insurance is and how it may provide the protection you need.
Let’s dig into what these policies look like and how they may help you.
What is Key Person Life Insurance?
Key person life insurance policies typically protect one individual. In the event that this single person were to pass or become unable to work, this policy would financially protect its purchaser. In most cases, the business would purchase a policy, sometimes also called a Keyman, Key Woman, or Business Life Insurance, and the business would be responsible for the premiums each month.
Businesses that may want to consider such a policy often have a unique person with specific skillsets or abilities that, without which, the company could not continue. Let’s, for the sake of understanding, imagine Joe’s Bakery as a business. Joe is a talented baker who is famous for his baked goods, which are sold nationwide. These are handcrafted, artisan items that only Joe can make. He has secret recipes and a lifetime of skilled training to achieve these goods.
If our imaginary Joe were to pass away, Joe’s Bakery business may have to close its doors. Without Joe, the talent, the know-how, the recipes? It all goes away. Now, Joe doesn’t run the bakery alone. He has an associate operating a cash register, placing goods in the windows each day. He relies on a janitor to keep the bakery clean. He has a financial officer who handles payroll, taxes, and billing. He even has a salesperson who seeks area businesses that want to offer Joe’s goods in their stores. Without Joe, these four other people would be without employment. Joe’s Bakery needs a Key Person policy.
How does Key Person Life Insurance Work?
In our example, Joe’s Bakery LLC would purchase the policy. It would pay, as the business pays monthly premiums to insure the LLC. Upon Joe’s death, the policy could be used to cover various costs.
Replacing a Key Person
Let’s say the business hopes to continue, carrying on Joe’s legacy even after his life is over. Funds received from the policy may go to hiring a new baker, training that person or persons, and even covering costs while the business restructures.
If the Business Can’t Go On
In the event that it is proven Joe is irreplaceable, as predicted, a key person insurance policy might help to shutter the business, paying out partners, debts, salaries, and other necessary bills as the company comes to a close.
Avoid Bankruptcy
Without a policy, the employees, shareholders, and other connected debtors may face significant financial losses. In fact, the only option once Joe is gone may be to file for bankruptcy. A key person policy could help the LLC to avoid such a filing, protecting the assets and involved funds until future plans can be ironed out.
Types of Key Person Life Insurance
A wide variety of risks can be protected with a key person life insurance policy. Some policies may outline the specific uses for the funds by category. Some of those might include:
- Insurance to protect profits, lost income (due to the loss of the key person)
- Protection for shareholders’ or partners’ interests
- A guarantee for lenders, such as banks, providing loans to the business
The Cost of Key Person Life Insurance
Costs for policies will vary largely based on two factors. First, the amount of payout selected will greatly impact the price. Small policies that may payout $50,000 to $100,000 to the business if there is a loss of a key person will cost far less than, say, one for a $1 million payout.
Second, the choice of a term or permanent policy will impact how much its monthly premiums will cost. A term policy, which is only good to a precise age of the key person or year of the business, will be less costly than one that is permanent (meaning one without a set deadline or end date).
Protections Offered by Key Person Life Insurance
If your business greatly relies on just one or two people, you may want to consider life insurance to protect your investment. A business is much like a family, and if the loss of a key person means the entire family will fail, it is smart to seek a policy that fully covers costs and financial needs, so that the loss of that key person doesn’t mean the end of the business entirely.
If you’re unsure whether your business needs or qualifies for Key Person Insurance, please contact my office for a no-obligation conversation. We can discuss the options and determine if you need to purchase this type of policy.
