Key person life insurance allows businesses to take out a life insurance policy on an irreplaceable member of their team whose death would otherwise cause sudden financial hardship for the business. A key person may include the business founder, a partner, or a key member who would be difficult (if not impossible) to replace in a timely manner. Key person life insurance differs from a regular life insurance policy in that the business is the beneficiary - not the person's family.
Is a key person life insurance policy right for your business?
- This type of life insurance could be an especially good option for smaller businesses that would not have any other recourse but to suspend operations or shut down the business in the event that a key person passed away unexpectedly. The death benefit could provide the business with liquid assets necessary to either continue operations while seeking a suitable replacement for the key person, or close the business. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and begin the process of systematically closing down the business. In an emergency situation, key person life insurance gives the company some options other than filing for bankruptcy.
- Since individuals are far less likely to stay with one employer for the duration of their entire career than they were in decades past, a key person term life insurance policy may be sufficient for some businesses. However, you'll want to talk to your life insurance agent about what type of policy is best for your business.
- As an entrepreneur, you've got a lot going on just to keep the flow of business going on a daily basis. Key person life insurance may not be on the top of your to-do list, but it's important coverage that will be there at a time when you need it the most. The next time you review your business insurance with your agent, ask him or her about key person life insurance.