If you’re launching your own business, you’ve probably been offered key person insurance as one of your life insurance options. Key person insurance is certainly a good option for some business owners, but is it necessary for you? Let’s take a look at what key person insurance is and whether it can be beneficial to you and your burgeoning business.
What is Key Person Insurance?
Key person insurance is an insurance policy that’s taken out on someone who is central, or key, to the successful operation of a business. Larger companies may want to take out a few key person policies, whereas smaller companies can easily pinpoint one person who carries the company on their shoulders. A key person policy is usually a life insurance policy, though there are also key person policies that cover an extended period of time when a person can’t work but hasn’t died.
No matter what type of key person policy, the business is the entity that purchases it and pays the monthly premiums. It’s also the beneficiary. As the beneficiary, the business will receive the death benefit of the policy should tragedy strike.
Benefits of Key Man Life Insurance
When the founder, owner, or partner of a business dies unexpectedly, the business itself may be in jeopardy. Key man life insurance offers the company a reprieve during which a permanent solution can be found. It helps the remaining staff/partner buy time to find a replacement, pay off debts, or close the business in an orderly manner. All are better options than immediate bankruptcy.
If you’re the only person involved in your business, key man life insurance isn’t necessary. This is because key man life insurance won’t be able to salvage your business if something happens to you — if the only employee is no longer there, the business won’t last. However, what is important is personal life insurance, which will cover the families of one-person business owners. Personal life insurance can be whole, term, traditional life insurance, no exam life insurance — whatever the purchaser feels comfortable with.
If you operate a business that employs more than one person and you want to get key man insurance, the next question is, how much coverage should you get? There are two main factors that you should consider when making this decision:
- How much money would the business need to keep it temporarily afloat until a permanent solution can be found?
- What amount in monthly premiums can the business afford?
Typically, you should get different quotes for different amounts of coverage and see which one is the most worthwhile, all the while keeping an eye on the company budget.
If you’re still unsure whether key person insurance is necessary to your business, here are some questions to help you decide.
- Does your company employ more than one person?
- If someone who is crucial to your business dies unexpectedly, will the business be able to stave off bankruptcy without a life insurance policy?
- Can the business afford to pay monthly life insurance premiums? If not, are you covered with personal life insurance?
There should never arise a situation in which the owner of a business doesn’t have any life insurance coverage. So while key person insurance may not be what you need right now, it’s crucial that you’re covered by a different life insurance policy. Life insurance guarantees that your loved ones will be financially covered in case of a disaster, and that alone is worth the monthly investment.