Key Person Life Insurance: What Small Business Owners Need to Know

We all know that life insurance helps you protect the financial future of your loved ones when you die. But, if you own a small business, what protection do you have in place to protect your business and any employees or partners you may have?

That’s where key person life insurance comes into play. This unique coverage pays the business in the event that the business owner or other key employee dies.

There are many reasons that key person insurance would be a smart option for your business. If any of the following situations exist for your company, you should consider coverage:

  • The death of the key employee could cause the death of the business.
  • The death of the key employee could financially cripple the business.
  • If one of the business partners wants to be able to buy the other partner’s shares of the business in the unfortunate event of their death.

It is not uncommon for small businesses to rely heavily on a few key people. In fact, in a survey conducted by the National Association of Insurance Commissioners (NAIC), 71% of small business owners reported that the profitability of their business was “very dependent” on one or two key people. Despite that fact, the same survey revealed that only 22% of those companies carried key person life insurance for their critical employees. 

How Much Coverage Do You Need?

To determine how much coverage you should buy, first consider the financial impact that the death of an indispensable employee would have on your business. For example, if you are the sole business owner, you may only want enough coverage to help your heirs close your business and pay the company’s debts. If you are covering a key salesperson, you would want a policy that provides enough to cover the loss of sales income while you find someone new to replace that income.

Who Owns and Benefits from the Policy?

In most cases, premiums for key insurance coverage are paid by the business and the business owns the policy. As a result, the business is the beneficiary. The key person named on the policy, however, must provide written consent allowing the company to own the policy. 
If you think key person insurance is right for your business, talk to your broker about a policy.

 


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