Most businesses are built on the back of some key individuals. These could be company founders, your top sales employees, or even your IT wizard that keeps you connected. But what happens when one of these key persons should disappear? There is a way to protect your organization against the financial loss of a key employee. It’s called key person insurance and there are a number of benefits to purchasing a policy to cover those individuals that your company relies on.
What is key employee insurance?
Key person insurance or key employee insurance is a policy that cover the life and health of a valuable employee. This could be the CEO, business owner or anyone who is vital to the organization. Unlike personal life insurance, with key employee insurance the company pays the premiums, but they are also named as the beneficiary. That means the organization will be paid the death benefit if something happens to the key employee.
What does key person insurance cover?
Key person insurance provides protection in case the employee passes away or is critically injured or sick. It does not cover any costs related to the employee leaving the company voluntarily or if the organization fires the key person. The death benefit payment can be used to help the business manage expenses of recruiting and replacing the key person. That includes:
- Operating expenses
- Recruiting, Training and onboarding of replacement
- Make up for lost income or productivity
If the business decides to close, the life insurance proceeds can also be used to do this in an orderly way. In other words, you could use the money to cover debt, pay employees, etc.
How key person insurance works
Key person insurance is meant to help an organization make it through tough times if they lose a vital employee. Here is how the policy works.
- An organization buys key person insurance for an employee
- The business pays the insurance premiums and is appointed beneficiary of the life insurance policy.
- If the key person passes away or is diagnosed with a critical illness, the organization will receive the insurance payout.
The life and critical illness insurance policy provides protection for the company in the event they lose a key person at their business. It can buy your organization time to recruit and train a replacement or to continue to cover expenses until a new employee can be found.
Types of key person insurance
Key person insurance is a form of life and disability insurance. There are a few different types that your organization can choose from, such as:
Term key person life insurance
Term key person life insurance is one of the most straightforward forms of life insurance. The coverage is available for a set time or term, for example, 10 or 15 years. If the key person passes away within that time, the organization will receive the payout. When the term is up, you can renew the coverage. Term life insurance is one of the most affordable types of life insurance.
Whole life key person insurance
With whole life insurance, you can have coverage for the entire life of your key person. You won’t have to worry about the policy expiring or having to renew your coverage. However, premiums for whole life insurance are more expensive than term life insurance. And part of the premiums paid will be diverted into savings so you can build up cash value in the insurance policy.
Critical illness insurance services
Critical Illness pays a lump sum cash benefit in the insured is diagnosed with a covered illness. Cancer, Stroke & Heart attack are nearly 80% of all claims for this type of coverage.
Disability key person insurance
A disability key person insurance policy protects the organization if the employee is injured and unable to fulfil their duties. This is usually an add-on to other key person insurance policies. With this coverage, the insurance company agrees to pay a percentage of the key employee’s salary.
Benefits of key person insurance
Having key person insurance provides a peace of mind for the business and investors. There are many ways the policy can benefit the organization, including:
Financial protection
Key person insurance policies are meant to cover those vital employees that are essential to the financial wellbeing of your company. In the case something happens to them, your companies revenue and future could be at risk. However, with key person insurance coverage you’ll have some financial protection. The proceeds of the life insurance company can help you weather the storm until your business is able to replace and train a new employee.
Business loans
Some financial institutions and banks will require you to have key person insurance before you can take out loans. Having this type of insurance provides security for the lender. They will be more confident that the loan will be repaid even if your organization loses key employees.
Avoid bankruptcy
In the case that the loss of your key person leads your organization to considering closing, having the insurance proceeds can protect you from bankruptcy. Your company can use the funds to pay investors or shareholders, cover final costs of employees, pay debt, bills, etc. It allows for a more orderly shut down of your organization’s operations.
Tax free proceeds
It’s important to note that if your key person passes away, the life insurance proceeds your organization will get are tax-free. That means you won’t have to worry about claiming it as business income.
Which key employees qualify for insurance?
Any individual that your business relies on for financial success could be considered a key person for insurance purposes. Consider all the core employees that your organization needs to be able to earn profits. It could include the business owner, your business strategist, the top sales performer or even someone on your IT team that keeps everything running smoothly.
Employees that benefit your business with their knowledge, performance or even their network of contacts could qualify for key person insurance.
Which key employees qualify for insurance?
The cost of life insurance policies for your key employees can vary depending on the type of insurance you buy. There are also other factors that influence the cost of key person insurance, including:
- Gender of key person
- Age of key employee
- Health history of key person
- Amount of coverage your organization wants
- Salary of key employee
- Occupation and industry of key person
Some life insurance companies may request your key employee to undergo a medical exam before they’ll approve key person insurance.
Why Shelter Bay?
Together, our Shelter Bay insurance brokers have over 200 years in the business. That is a lot of insurance expertise. Additionally, our team has access to various life insurance policies offered by different life insurance providers. We don’t advocate for any single insurance company, but rather aim to find you the best policy for your protection.
Securing the future of your business depends on protecting those key persons in your organization. Our insurance brokers can help you determine the right policy and the best coverage for your company. We’ll be with you every step of the way and answer any questions you have about key person insurance.
We understand that you’ve put a lot into getting your business where it is today and you want to protect it for the future. Contact one of our Shelter Bay insurance brokers today and let us find you the best key person insurance policy for your organization.
