Most companies have at least one individual who is a critical part of the company’s operations and success. This person may be a partner come, owner, majority stockholder, or another individual who plays a critical role in the company’s success. If this employee were to unexpectedly leave the business due to a death disability or immediate resignation, it might be hard, if not impossible, for the organization to survive.
If your company has an employee who is vital two its success, critical person life insurance or key-person disability insurance can help protect you and your company from a significant loss caused by their absence. Critical life insurance is a great solution that can give your organization options other than bankruptcy should you lose your company key person or people without notice.
How does key person life insurance work?
- The employer purchases life or disability insurance for this key individual
- In most cases, the employer is the beneficiary of the key life insurance policy and owns the key life insurance policy. If a key employee dies, the policy pays out to the employer.
- The money is tax-free from the policy. It can be put toward finding, hiring, and training someone to replace the key employee, compensation for lost business during the transition, and financing timely business transactions.
- The policy can be transferred to a departing key employee as a retirement benefit or a different key individual upon the retirement of the original key employee.
- The proceeds from the key life insurance can be used to buy out the key employee’s shares or interest in the company
- Key life insurance premiums are based on several factors, including the key employee’s age, physical conditions, health history, and the amount of coverage.
Key person disability insurance versus key person life insurance
When most company leaders think of purchasing key life insurance coverage, they turn to life insurance. However, industry leaders point out that the chance of losing a key person to disability is 17 times greater than losing a key person to death, and the cost of hiring a recruiter to replace the person and training them for a short period. It could be much higher than finding a permanent replacement for the key life person.
Considerations before purchasing key person life or disability insurance
- Estimate the value of your key employees. Think about the projects that would be lost without these people, the number of sales generated by these people, and the cost associated with replacing them.
- Determine if this coverage is necessary, as credit insurance will cover outstanding loans and debts.
- Create a business continuation plan that outlines how your business will function if you lose key employees.
Requirements and coverage options
To obtain key person disability or life insurance, the individual must be a consenting employee, and you must demonstrate that the company would incur substantial financial loss without this employee. To qualify as a key person, most insurers require that the employee salary is in the top 20% of the business. All key person life insurance policies are written specifically for the employee in question. Contact Songer Benefits today to learn about coverage options, limits, and other plan details.