Think of Key Person Insurance like a life insurance policy for the critical people helping you run your business. If a horrible accident were to occur, key person insurance gives your company some options to avoid immediately going out of business.
The death of a key person in a company could cause the immediate halt of operations. In a small business, this is usually the owner, the founders or perhaps a brilliant employee. These are the people who are crucial to your business, and you need to consider additionally insuring those people.
This type of policy can buy you the time it takes to come up with a plan during an emergency.
So how does Key Person Insurance work?
A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of that policy. If the insured person unexpectedly dies, the company receives the insurance payoff just as a spouse receives the benefits of any personal life insurance policies on him or her.
Is there a way to determine if I need a policy on a certain employee?
Determining how much key person insurance to purchase takes just a little calculating. You will want to take into consideration a couple of the following things to consider when deciding how much key person insurance to purchase:
How much is your employee paid in salary?
Estimate the company’s earnings that are traceable to that key employee.
Estimate the reduction of value of the business that would occur due to the loss of that key employee.
Can your business afford to pay the insurance premiums?