The small business you started with your college roommate isn’t so small anymore. With $2 million in revenue and about a dozen employees, things are going well. One independent appraiser values each 50% stake at more than $5 million each.
And then tragedy strikes. Your business partner dies without recourse or a succession plan. Her stake in the business passes to her foolish husband, and her husband starts ranting about how he will “improve” his well-selling business. Your company’s sales drop, your income dries up, and you start thinking about doing something else with your life.
What is Key Person life insurance?
Key person insurance is life insurance that a company buys based on the life of an owner, executive, or other person deemed important to its business. The company is the beneficiary of the insurance and pays the premiums. This type of life insurance is also known as key man insurance, key man insurance and business life insurance.”
How does it work?
The employer is Wallace Welch and Willingham, Inc. (W3), which takes out employee life insurance through an agent such as. The employer owns the policy, pays the premiums and is the beneficiary. If an individual dies, the business owner will receive a tax-free death benefit. Insurance benefits help companies get over the shock of losing people who are succeeding in their business. You can spend time finding, hiring and training new employees, making up for lost income during a period of transition, or whatever else the company needs. Retirement benefits allow you to pass policies on to retirees or other key employees in retirement. It can also be used to buy shares of key employees’ stock or stakes in companies.
Who can be a key person?
Anyone who is a key person can be directly involved.
A business whose losses could be a financial burden on the business.
For example, that person may be a director of the company.
Partners, key sales representatives, key project managers, or others are involved.
Possesses special skills.
What types of life insurance can be used as key man life insurance?
Life insurance can be structured in any form as key man life insurance.
- Life insurance includes: Life insurance is insured for 10 to 40 years. It is less expensive than life insurance. For example, some people have a key personnel policy related to their retirement date.
- Permanent life insurance: Permanent life insurance provides life insurance. A portion of the premium for permanent life insurance is paid into cash value accounts, the value of which increases over time. The cash value of the insurance policy is an asset that can be used as collateral for a loan, and if the mutual insurance company issues the policy, the company can receive dividends. In addition, permanent life insurance can be sold as a life insurance payout if the value accumulates over time and your employer determines that you no longer need the coverage.
Life insurance is expensive, and the company’s needs may change. Term assurance insurance is often used for key man life insurance. Life insurance can be structured as an employee benefit if the insurance contract and its cash value can be transferred to the insured after a certain period of time or at a certain point.
No matter what type of life insurance you have, be flexible. For example, if you add a business exchange member to a permanent policy, you can change the insured if that employee leaves the company. Similarly, many large executive life insurance policies allow you to regularly increase or decrease your policy limit as needed.
Do key people need life insurance?
Key person life insurance may be needed if the death of an employee or business partner causes serious damage to the business.
Start with employees and partners whose losses threaten the long-term profitability of the company, even if the company is not in its right. These are the most important people to insure.
For employees who think it’s small but very important, think about how much it will cost to replace and how long it will take to shorten the replacement time. During this period, your business will likely be less profitable, so you should consider the overall cost of lower wages.
At some point, even though life insurance is essential to your success, signing up for life insurance for your employees is no longer worth the effort and expense. Replacing an employee is always expensive, but that doesn’t mean that everyone who works for you should cover the cost of hiring and training your successor.
When does your company require key man life insurance?
Banks and the SBA often require key man life insurance for loans or investments. Because without one or two employees, it can be difficult for a small company to survive. Since the same thing can happen to investors, they may want assurances that losing these people won’t cause the company to go bankrupt.
Companies sign up for basic life insurance to protect themselves from loss. If a company employee dies, it will affect how much money you make on that type of insurance. For example:
This company’s brand is tied to one person’s name.
A company’s performance is affected by the skills of its employees. Projects are often tied to their abilities.
If an employee leaves, the business may lose customers.
If a company loses employees, it affects the repayment period of loans or corporate loans.
If someone in your company is needed and they die, your company may not survive. If that happens, you can use a Keyman Policy to pay off the debt left by that person. A Keyman Policy will also return some of the money to investors in that business.
Keyman life insurance can also be used as an incentive for employees to stay with the company. For example, you can sign up for life insurance that they get when they retire. Or maybe after a certain period of time they can work and hopefully give it to them.
Major personal insurance costs.
The premiums a company needs depend on its size, the nature of its business and the role of key employees. It is worth requesting an estimate for $100,000, $250,000, $500,000, $750,000, $1 million policies and a cost comparison for each.
The cost will also depend on whether the company buys term life insurance or permanent life insurance. Long-term life is almost always quite affordable.
Also, as with most other life insurance plans, the cost of coverage will vary depending on the age and general health of the insured.
For example, a major insurer will now charge a healthy 50-year-old man $500,000 and $107 per month for 20 years of coverage. If you increase your coverage to $1 million, your monthly cost would be $190.