Key Person Insurance for Small Businesses

It seems that every small business has one guy that makes everything happen. He is the employee of the month, every month. He is the one who is the first one in, the last one out, the man who can seal any deal, solve any problem and has the right contacts to make things happen. The truth is, with many small businesses from a family restaurant to a local accounting firm without that one man, the business itself would crumble. Thankfully, there’s a way to protect yourself from that fate.

Key person life insu Key Person Insurance

rance is a life insurance policy that business owners can take out on their star employee. The policy is paid for by a business to compensate that business for financial losses that may arise from the death or extended incapacity of an important employee.

What it Covers:

The policy's term does not extend beyond the period of the key person’s usefulness to the business. So a key person policy would not replace regular life insurance. It is completely separate and serves a very different purpose. These policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity.

Who Should Have a Policy?

Businesses should consider these policies when they have one specific person whose knowledge, work, or overall contribution is considered uniquely valuable to the company. If the loss of one specific person would mean devastating losses to the company as a whole, then a key person insurance policy might be considered. The key person could be a director of the company, a partner, a key sales person, key project manager, or someone else especially valuable to the company. Many key person policies not only cover death, but debilitating illness or chronic sickness.

Why Get Coverage:

There are four main areas that a key person policy would cover. These areas often prevent irreparable loss to a company which would have no other options if not for key person coverage:

Replacement Costs: The policy could cover any loss related to the key person being unable to work. This may cover the cost of temporary personnel, finance the recruitment and training of a replacement, etc.

Profit Coverage: This would offset lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge, etc.

Shareholders or Partnership Protection: This type of policy would enable shareholdings or partnership interests to be purchased by existing shareholders or partners.
Loan Coverage: This protects the company if the key person was a guarantor on a business loan or agreement, the insurance coverage would be equal to the value of the guarantee.

How to Obtain a Policy

It is common for a business to own the policy, rather than individuals. With business ownership, the claim proceeds are paid directly to the business and there are no legislative or insurability requirements. The amount and cost of insurance needed for a particular business depends on the situation and the age, health and role of the key employee.

For companies built on the backs of one or two key individuals, it is probably worthwhile to ask your insurance provider about key person life insurance policies.

By Matt Reynolds - Google+

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