Every employee in a business should have access to comprehensive benefits. However, key person insurance focuses on the team members essential to business operations, such as the CEO, COO, or anyone in a crucial managerial role with specialized and indispensable skills. It provides a vital buffer stabilizing a business as it works toward a new leadership direction. The loss of particular employees has a devastating impact on a commercial establishment. For this reason, companies take out key person insurance. Here is what you should know about key person insurance.
How Key Person Insurance Works
Key person insurance is life insurance that pays a business upon the insured’s death instead of that person’s beneficiaries. The policy provides funds that ensure a business stays afloat if the insured person becomes disabled or passes, provided the plan has an additional disability rider. Typically, the insured or one of their family members owns the policy and pays the premiums. While the company owns the plan, the employee still has to consent. When the insurer passes or becomes disabled, the business becomes the beneficiary and receives the death or disability benefit. However, before a company-owned life insurance (COLI) policy becomes taken out on an employee, life insurance companies require the written consent of the insured person.
When a Business Should Consider this Life Insurance Plan
A common reason businesses opt for this life insurance plan is they are applying for some form of financing like a business loan. Many lenders or investors require this type of life insurance as collateral. What typically happens is that the death benefit goes towards paying back the loan first. Then, the residual money goes to the business. However, there are multiple other reasons to consider key person insurance, such as:
- The loss of this person impacts the company’s sales or finances.
- A person being the sole proprietor of a small business and wanting to provide an insurance payout that allows their heirs to close the company and pay off business debts.
- The business has partners, and each partner wants funds to buy out the other’s shares if there is an untimely death. This process refers to a “buy-sell” agreement.
How Much Coverage You Need
Ultimately, you want to ensure that there are enough funds to pay back any loans. However, there isn’t a clear-cut answer to determine how much insurance you will need. Each business varies. Consider the financial impact the person’s death will have on the company and factor in:
- The time and money needed to find a replacement
- Operational disturbance costs
- Productivity and sale loss
- The time it will take to market the new position if the employee has a specialized skill set.
When in doubt, multiply the person’s salary and direct financial contribution to the company’s bottom line by five.
Contact Malden Solutions today for a deeper understanding of our life insurance policies. It’s always best to prepare for unexpected and unfortunate circumstances.
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Malden Solutions has a wealth of expertise in providing employer insurance solutions, HR solutions, and individual insurance solutions to businesses both big and small. Our team of seasoned professionals can help you navigate the rapidly-changing world of insurance with ease. We partner with businesses and individuals throughout the country to provide our dedicated services for employee benefits but also work within our surrounding communities in Maryland, Northern Virginia, and Washington, D.C. Contact us today to learn more about how we can provide effective, dynamic solutions for your business. Stay connected with us on Twitter, Facebook, and Linkedin.