What is key person life insurance?
Key person life insurance is a life insurance policy that is typically taken out on a business owner or someone who is vital to the success of the business.
A key person may be the owner or partner(s) of a business. It could also be a top salesperson who brings in lots of clients. It could be someone within the business that offers technical expertise or even top administrative assistance.
Key person life insurance offers a great way for business owners to protect their business at a small price in case of an unexpected death of a key person.
Example of how key person coverage works
ABC, Inc. is an established company listed as an S-Corporation that provides IT services to small and medium-sized businesses. Joe founded the company 10 years ago and grown the original staff of three employees to over 40.
As the company has grown over the years, additional leadership has emerged to meet the demands of its customers. Sally has been the lead in a number of programs that play a big role in the company’s future success.
Not only has she proven her ability to get new offices running smoothly, but she’s also responsible for maintaining ABC’s employee training programs.
Aware of the value Sally adds to the company, Joe considers how the business would survive without her. Joe consults with his insurance agent about protecting the business by purchasing a key person life insurance policy on Sally’s life.
Part of Sally’s job entails launching new store locations. In the event of Sally’s death, a delayed store launch could cost the company $200-$300,000. A key person policy with an amount of $400,000 would eliminate this loss.
How much do key person policies cost?
Much like personal life insurance protection, the cost of key person coverage depends on several factors. The age, sex, health, amount and plan of coverage will determine the cost. It is also important to note that each life insurance company underwrites risk differently. So, it is important to work with an agent who represents multiple carriers. Also, if a key person has a history of health problems you would want to work with an expert agent that specializes in this market.
Term or whole life insurance
The age-old question of term life insurance versus whole life insurance is always debatable. Term life insurance provides the biggest bang for the buck. You will get the most life insurance protection for the lowest cost with a term policy. Whole life insurance adds another component to the mix that business owners may find appealing. This component is tax-deferred cash values.
With whole life insurance or universal life insurance plans, the cost will be substantially higher than term insurance, but the coverage is a permanent type of protection and cash values might offer a good way to grow additional funds that could be used as an extra incentive for the employee.
An agreement between the business an employee could be written up that says the business will transfer the ownership of the policy to the employee if the employee works for them for a certain time, say 10 years. At the end of 10 years, the employee can then take ownership of the policy via the agreement and continue the policy or use the cash value.
There is no good answer on which plan works best until a complete analysis of the situation is made.
In summary, key person insurance offers a great way for business owners to transfer the risk of the early death of a valued employee to an insurance company- and typically at a relatively low cost. Check it out.This form is currently undergoing maintenance. Please try again later.
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