Have you or your company ever considered key person insurance? Key person insurance is a life insurance policy that a company purchases for someone such as an owner, CEO, or top executive that is critical to the business. The death of such a key employee could be devastating to the future of a company, so key person insurance offers a financial cushion to assist with offsetting the loss.
Key person insurance policies are set up so that a key employee is the insured on a life insurance policy, but the business owns the policy, pays the premium on the policy, and is the beneficiary on the policy.
Key person insurance can cover a range of risks. It could be used to:
Help with finding, hiring, and training a placement employee
Pay off debts and outstanding loans
Buy out deceased partner’s share of the business in a partnership
Replace lost profits
Fund a smooth transition of ownership
Provide severance to employees
Provide extra collateral when securing future loans
Many factors affect the cost of key person insurance, including the health of the person being insured as well as the amount of death benefit provided. The cost will also depend on whether you purchase a term life policy or a permanent life policy.
Term life is almost always cheaper, which is why it is typically the most popular option. In this case, premiums are paid on the policy during a set policy period, and if the insured passes away anytime during the term of the policy, the death benefit is paid out.
Permanent life insurance policies remain in effect for as long as you pay the premiums, although these types of policies may have a maturity date between 95 and 121 years old where either the cash value or death benefit is paid out on the insured person’s birthday should they reach the maturity date.
While it can be hard to place a monetary value on a key employee or owner’s impact to a business, there are some common formulas for calculating key person insurance coverage:
Cost to replace: In this formula, add up the costs required to find, hire, and train a replacement for the insured owner or employee. You should also include any lost business income during this time.
Multiple of compensation: Take the key person’s compensation and multiply it by the number of years that your business will take to fully recover from their loss.
Contribution to earnings: Multiply the revenue or profit that the insured individual brings to the business, by the number of years your business will take to replace those earnings.
Though you may have other insurance coverages to purchase for your company, key person insurance is not one to neglect. If you have any questions or would like to discuss obtaining a quote for this valuable coverage, please reach out to The Uhl Agency at 937-434-9090!
