When It’s Needed
A business may need key person insurance if it is dependent on a couple of individuals to succeed. By way of instance, Bob and Bill are brothers and business partners in a booming restaurant named Brothers Bistro. Each has particular skills that the other lacks. Bob is a creative genius and has an extraordinary talent for blending flavors. Bill has exceptional people skills and a good head for business. The restaurant’s success is based upon the abilities of both men. If Bob or Bill dies or becomes disabled, the company may not survive.
To protect itself, Brothers Bistro purchases key person insurance on both men.
You should consider purchasing key man life insurance coverage if your business has any of the following characteristics:
- It’s highly dependent on one or more people who have special abilities and would be tough to replace.
- Your company relies on a key person to produce a significant part of its income.
- Your business has debt which would be tricky to repay if a key person died or became disabled.
- Your business plans to find financing or investors. A bank or investment firm may refuse to extend the funding or make an investment in your company unless it’s key person coverage in place.
- Your company plans to merge or go public. Your company may require key person coverage for top executives and board members before it can proceed with a merger or IPO.
Key Person Life Insurance
A company purchases person life insurance to protect itself against the passing of an extraordinary individual. The organization is both the policy owner (buyer) and the beneficiary. The essential employee is that the insured. The person doesn’t get any benefits.
Key person life insurance is written as a policy or a term policy. A term policy is the cheaper of the two. It applies for a period. When the term expires, coverage ends, or the individual dies, whichever occurs first. A death benefit collects if the insured dies. The business may use the money.
Permanent person life insurance applies to the individual’s life span. It serves two functions: it pays a death benefit, and it is. If the company no longer needs the policy, A policy can be moved to the insured, state at the employee’s retirement.
A company may have more than one key individual. By way of instance, assume that XYZ is a company with five officers, all of whom are critical to the success of the company. To save money, XYZ could buy an integral person life policy that contains a”first to die” provision. If any of the officers expires, the coverage will pay a death benefit. The policy will then cover the officers.
Key Person Disability Insurance
Key person disability insurance protects a business against the risk that a key employee will become disabled to the extent he or she can’t perform his job. Benefits may be payable every month or as a lump sum. Benefits are paid after a specified waiting period. This period could be 12 or 18 months to get a lump sum payment and 30 or even 60 days for payments.
There is no “standard” key person disability policy. Rather, each policy is typically designed to meet the needs of the company.
Amount of Insurance Needed
Disability insurance or life if you buy on a person? To answer that question, you’ll have to estimate the financial loss (lost revenue or profit) your company will endure when a key person dies or becomes disabled. You’ll also need to take into account the expense of hiring, recruiting, and training a replacement worker. An insurance agent or broker can help you figure out.
Cost of Coverage
The expense of key person insurance is dependent upon the age, health, and gender of the insured individual in addition to the size and nature of the company. Two other variables are the type of coverage you buy (duration or permanent) and the limitations you select.
The premiums you pay for key individual coverage are not deductible for taxation purposes. The disability or death benefits your business receives are tax-free. Ask with your tax professional to ascertain your company’s taxes will have an impact on.