What Is Key Person Insurance?

If you are a business owner, you need to think about the future of your business and how to survive the most challenging of scenarios. This also includes the potential illness or death of key people within your business. Whilst not the most joyful of topics, sudden death or long-term illness could massively impact your business, especially when it comes to finances. You need to prepare your business for the worst case scenario and this includes what to do should this happen. 

Key person insurance is a policy that covers the life of an owner, director, executive or another person that is crucial to the business. Businesses will take out this cover to protect themselves in the event of something serious happening to these key people so that their business isn’t directly affected. 

Understanding Key Person Insurance

Taking out key person insurance provides some financial stability should the sudden loss of a certain individual within the business have a profound effect on the company’s operations. Key person insurance can include “death benefits” which, essentially, buy the company time to implement business-saving strategies or look into hiring another person. 

In a small business, key people usually are the owners, founders, directors or key employees, such as managers. The main qualifier when it comes to key person insurance is whether the person’s absence would result in major financial harm, If so, then taking out a key person policy would be worth considering. 

The Process Of Key Person Insurance

With key person insurance, the business purchases a key person life insurance policy for designated employees, then pays the premiums and become the beneficiary of the policy. In the event of the key person's death, the company will then receive the policy’s death benefits. 

This money can be used by the business to cover the costs of recruitment and training a replacement for the key person who is sadly decreased. If the business doesn’t believe that it can continue with operations, then the money can instead be used to pay off debts, provide severance benefits, distribute money to other investors or even close the business down in an organised manner. Rather than filing for immediate bankruptcy in the worst case, key person insurance gives the company other options.

For businesses to determine whether they need that type of cover, then the business leaders should consider who is and isn’t replaceable. For example, in many small businesses, the owner usually does most things, such as manage books, hire employees and secure new custom. Without this person, the business simply wouldn’t function. 

What Is The Cost Of Key Person Insurance?

How much insurance a business needs is solely dependent on the size and nature of the business, as well as the key person’s role. It’s worth asking a life insurance broker to do research if you’re not sure what types of insurance your business needs. Depending on the insurance you need, then the quotes will differ. The cost of coverage will usually vary according to the age and health of the individual, just like most other types of life insurance.