Key Person Life Insurance – Why Your Business Needs It
Key person life insurance policies can help you protect your business from financial losses if a key employee or leader passes away. Purchasing a policy is straightforward, and the process starts by identifying the individual in question and the appropriate level of coverage. Different factors contribute to the cost of coverage, including the key person’s age, health, and occupation.
The goal is to determine the amount of insurance coverage required to offset potential losses associated with the person’s death, or an illness that prevents them from working. You will also select who will be the beneficiary and how much the policy will pay out. Companies typically pay the premiums on key person life insurance policies.
There are different types of policies available, including term insurance, which covers a predetermined time frame, and permanent insurance, which offers coverage for the person’s entire lifetime. The latter form of coverage can be an expensive option, and term insurance is usually recommended for most businesses.
Determining how much key person insurance coverage you need is crucial. The amount of insurance should reflect the key person’s contribution to the business and the potential cost to replace them. A comprehensive coverage plan should include coverage for death, disability, and other circumstances that may arise.
Term Life InsuranceWhole Life InsuranceLower premiums than whole life insurance and adjustable to fit your company’s budget.Costly premiums, but they generate cash value over time.Covers a specific term (10, 20 years) and includes a death benefit for the beneficiaryCovers the person for their entire life and includes a death benefit for the beneficiaryOnly pays if the person dies while their policy is activePays out if the person dies and can be used through loan collateral
Generally, insurance companies recommend a coverage plan that is equal to 10 times the key person’s annual salary. However, each business is unique, and it is crucial to seek the expertise of qualified insurance professionals to customize a coverage solution that meets their specific needs and budget constraints.
