A way for businesses – especially niche businesses – to address a major risk.
Who are the people most crucial to your business? Have you taken steps to insure them?
At every company, there are certain people who are essential to day-to-day operations. If they die, the business may face an operational or financial crisis.
Key person insurance is designed to help businesses deal with this circumstance. Its payout can offer some monetary relief, so that operations can continue running smoothly.
Companies purchase key person insurance for a variety of reasons. They realize that the insurance benefit could help them settle outstanding loans or pay for the recruitment and training of a new hire. Additionally, the policy may play a role in an ownership transition or an executive compensation plan. If a key person dies, the business may even want to provide their spouse or family with the equivalent of their salary for a time.
How easily can this coverage be arranged? Quite easily. In fact, any type of term or permanent life insurance policy can be structured as key person insurance. Many companies buy on price and opt for term coverage, but permanent coverage can be offered as an employee benefit, which can eventually be transferred to the insured party – a nice perk for retirement.1
Key person insurance is constructed so that the company is both the policy owner and beneficiary. (It is alternately known as corporate-owned life insurance, or COLI.) As a first step, an insurer provides an acknowledgement and consent form that the business must use to legally notify the key person of its intent to buy such coverage. This form explains the coverage, and the key person must sign it before the policy can be bought.1
A good key person insurance policy should have flexible terms. It should give your business the option to raise or lower policy limits. In the case of a permanent policy, your firm should have the liberty to change which person is insured.1
Premium payments on a key person insurance policy are usually not tax deductible, but the policy payout is commonly tax free. There are no tax consequences for the insured person, unless they are named as the policy beneficiary or become its owner.1
Key person insurance may also boost your standing as you seek financing. If you apply for a business loan, you will be asked if your company has key person insurance. If it does not, the loan may not be forthcoming. Key person insurance is often a prerequisite for loans guaranteed through the Small Business Administration (SBA).1
Niche businesses arguably need this coverage the most. A software development firm, a biomedical company, or any kind of business where the owner or employees must have “expert” knowledge of a discipline or an industry, these are the businesses that may be most at risk should a key employee die.
Is your company without key person insurance? Many businesses are. While insuring a company’s information, equipment, and inventory against loss is par for the course, insuring a business against the loss of human and creative capital is not. A loss of knowledge and mastery can spell the end for a small business that has transitioned from survival to success. Look into key person coverage today, for you never know what tomorrow may hold.
1 – valuepenguin.com/life-insurance/key-man-insurance [5/8/19]
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