Every business organization has a key person or persons who should be considered to be insured with Key Man Life Insurance This is the person or persons typically responsible for the product or service that drives revenue to the company.
Key man life insurance can be the owner or officer or simply the person who is depended on for the success of the organization. If this person were to die or become disabled, it is imperative that the company has a plan to replace them. This plan can easily be funded with life insurance that would make the funds available for the following expected expenses:
- Pay for inevitable recruiting expenses.
- Replace lost revenue during the recruiting period.
- Pay off or pay down company debt.
- Help pay distributions to all investors in the organization.
- If found necessary, pay expenses to close the business in an orderly manner.
How it Key Man Life Insurance Works?
The business designates the key person or persons and purchases term insurance in an amount sufficient to cover expected expenses and losses for a period of one or two years. The insurance premiums are paid by the company and the company is the beneficiary. In the event of the death of a key person or persons, the life insurance proceeds are paid to the business entity and will be available to help the business financially survive the loss of its key person or persons.
Which Key Man Life Insurance Product to Use?
Depending on the needs of the business, the insurance product to use for key man life insurance is either Term Insurance or Whole of Life.
- Term key man insurance is the most affordable way to insure the lives of key personnel, but there are no “living benefits” that can be accessed if needed. If your key person leaves the business, the company could assign the ownership to the named insured in order for them to continue the policy if requested rather than cancel it.
- Whole of key man life, although somewhat more expensive, does offer “living benefits” for the business and the insured key person. For example, since the company owns the policy, it could access the cash value in the policy for financial emergencies or other reasons through policy loans or partial surrender. If the key person were to leave the business or retire, the company could surrender the policy and offer the proceeds to the key person as a bonus or incentive for offering a longer than usual notice. The Whole of Life policy also has the flexibility to change the face amount and periodic premium however the company sees fit.
Having a defined business continuation plan should be a key component in any organization and life insurance is the most affordable and efficient way to fund this plan. For more information, speak with a Trusted Union insurance professional about making certain your business survives if the worst thing should happen.