Key person life insurance can be a business-critical tool for risk management. Businesses use this type of insurance to protect their financial stability in the event of losing an essential team member.
A key person is often a founder, executive or top salesperson whose skills, knowledge or client relationships are vital to the success of the company. Business leaders need to recognize when using key person life insurance might be necessary to offset inevitable risks.
How does key person life insurance work?
When a business takes out a key person life insurance policy, the company is both the owner and the beneficiary of the policy. If the insured person dies unexpectedly, the business receives a payout. This financial safety net can help cover various expenses such as hiring a replacement, paying off debts or compensating for the loss of revenue.
How do you know if you need key person life insurance?
Companies that rely heavily on just a few individuals can be at significant risk if those key employees leave or pass away. This is particularly true for small businesses where leadership consists of only one or two people. Without a plan in place, the sudden loss of a key person can lead to catastrophic operational disruptions and damage to customer relationships.
What is the value of a key person life insurance plan?
The amount of coverage a company might purchase for key employees depends on several factors. These include the individual’s contribution to the business, the cost of finding a replacement and the company’s projected revenue loss. Businesses can use key person life insurance as part of a broader risk management strategy to protect their operations and ensure long-term success.
Key person life insurance can offer peace of mind for business owners. It ensures that the company can recover and continue to operate smoothly even after the unexpected loss of an essential employee.
