Why A Business Should Purchase Key-Person Insurance?
Any person that makes a valuable contribution to a company may be deemed a key person. A scientific or medical company may rely on a specific scientist working on a new drug. A manufacturing company may depend upon the talent of a specially qualified engineer. The CEO or President of a private company be a key person for life insurance.
Why Purchase a Key-Person Policy?
A small business is often extremely vulnerable to the loss of one or two key people. In the event of an untimely death or disability, the policy would provide the financial means for the small business to continue operations despite the loss of the critical employee. Business owners also opt for key-person protection to satisfy the concerns of investors, shareholders or partners.
What Is Commonly Covered?
In general, key-person policy insurance protects a business against lost profits directly related to the specialized skills or contribution of the particular employee. Losses related to the need to hire or replace a critical employee. Additionally, for the interest and protection of shareholder or partner interests is also a typical provision.
Understand The Difference: Key-Person Versus Life Insurance
Small-business owners often confuse key-person coverage with life or disability coverage. In fact, some business owners purchase life insurance on a key employee rather than key-person coverage. Unfortunately, that may be a mistake. Both life insurance and key-person coverage protect a critical employee, but there are a few important differences that every small-business owner needs to understand in order to make an informed decision.
- Protecting the Business: The main difference between the policies is the emphasis on protecting the business versus the employee. In the event of disability, the impact on the company may be substantially different than on the individual. Key-person policy insurance recognizes that impact and provides valuable protection for the business.
- Minimal Coverage: One of the most significant reasons to purchase key-person coverage rather than a company-owned life insurance policy is the dollar amount of potential damages. The coverage of most life insurance policies is fairly minimal when compared to the real value of the company.For example, a life insurance policy in the amount of $1 million or even $5 million may be very small in relation to the full value of the company itself. Investors, partners and other stakeholders need assurance that they are protected in the event a critical contributor is no longer able to perform.
- Tax Free: Last but not least, most proceeds received by a business in the event of a claim are tax-free, which is a significant advantage to a small business required to justify long-term expenditures during a period of adjustment and growth. By minimizing risk and locking in affordable long-term security, it’s possible for a small business to generate impressive investor interest, especially given the relative scarcity of alternatives in today’s tough economy. Thus, tax-free claims, protection for the business and the dollar amount of potential damages are some of the reasons your business should consider looking into key-person policy insurance.