Small and medium-sized businesses often have employees that are “stars.” Sometimes the star is the CEO or president, other times there is a salesperson who consistently outsells every other sales team member by a two to one margin. A software company has a star coder whose ideas led to your product being a number one editor’s choice. The point is that most companies have an employee or two that helps their business thrive. What happens to your business in the short-term if a star employee, referred to by the insurance industry as a “key” employee dies?
Death is an issue that most people do not like discussing; so, many small and medium-sized businesses do not have detailed succession plans, and key person life insurance remains an unresolved issue. It is a discussion that helps your company survive hard times that follow the death of a key person.
What is Key Person Life Insurance?
Keyman life insurance protects a business from economic loss relating to the death of a key employee. The company buys the insurance, owns the policy, and is the beneficiary of the policy in the event of the sudden death of the insured. Payment from the insurance company to the business is a lump sum, and there are no restrictions on how the company uses the money. Most companies use the money to stabilize the business until they find the key person’s replacement.
Types of Keyman Life Insurance
Businesses gravitate to two kinds of policies for key employee life insurance.
Term Life Insurance: startups favor this type of policy. As startups always try to conserve cash, term life insurance is cheaper than any other kind of personal life insurance.
Policies that build cash value: Whole life or universal life insurance builds cash value that increases the cash value of the policy and is an asset on the company’s book. The company can get access to the excess cash value of the policy at any time for any purpose as the money from the cash buildup belongs to them.
Life insurance premiums vary between companies and smart companies comparison shop for the best insurance program.
The discussion is uncomfortable, but, if you do not have key man insurance, act now.