Using Key Person Life Insurance To Protect Your Business
If you own or operate a business, it is likely that there are certain individuals that you rely on to help the business succeed. Oftentimes, these people will work in some type of management, partnership, or other ownership roles.
These key employees are an essential component of the company’s overall success – and because of this, the business should take into consideration just how big of an impact it would make if one or more of these employees were to unexpectedly pass away and no longer be part of the company’s operations.
In many ways, companies have similar life insurance needs as families in that the survivors can require financial protection against the untimely passing of a breadwinner in order to pay expenses going forward. With this in mind, in order to protect a company in the event of the death of a key person, key man life insurance is oftentimes used.
What Is Key Person Life Insurance And How Does It Work?
Key man life insurance, also often referred to as key person life insurance, is defined as a type of life insurance that a business purchases on the life of a key executive. The company is named as the policy’s beneficiary and it will receive the proceeds should the individual pass away while the plan is in force. The company also typically pays the policy’s premiums.
Should the insured pass away while the policy is in force, the proceeds may be used for keeping the company afloat while a replacement is being sought or other strategies are being implemented in order to save the business. The funds from the life insurance can help to ease the negative effect that the loss of the individual would essentially have on the company.
What Types Of Life Insurance Are Available?
Term Life Insurance
The company will receive life insurance protection and no type of cash value build up when they purchase a term life insurance policy.
While using term insurance will typically provide the company with the opportunity to pay lower premiums – at least initially, provided that the person is young and in relatively good health – these types of policies need to be renewed. Therefore, as the insured ages, it is probable that the premium will increase at each renewal period. In addition, the insured individual may also contract various health conditions making him or her uninsurable at a later date.
Permanent Life Insurance
If the company chooses permanent life insurance for its key man life insurance coverage, they will receive life insurance protection and a cash value component.
Going with a permanent life insurance policy will require a higher initial premium in the beginning. However, it is likely that this premium will remain the same throughout the entire life of the policy. Permanent policies do not need to be renewed.
A permanent policy can also provide companies with benefits in addition to just life insurance protection. For example, companies that opt to go with permanent policies can over time build up a substantial amount of cash value. This cash can be considered an asset of the company – and the funds could be used for paying company expenses, for purchasing company assets such as equipment, or for other company needs as the business sees fit.
Benefits of a Key Man Life Insurance Policy
Having key person life insurance in place can also be seen as security by a company’s customers, as well as its investors. In this case, there are many customers who do business with a company specifically because of a particular employee or sales person.
In other instances, customers only do business or purchase stock in companies that have a key man life insurance strategy in place. This is because they would not want to lose money if a key executive were lost and the company in turn suffered financially as well. Therefore, this type of life insurance strategy can essentially be a way to get and keep customers and stockholders in place.
Another benefit to having key person life insurance is that of helping the executive’s family with paying for the individual’s final expenses and other funeral related costs. These plans can be structured so that some funds can go to the person’s loved ones for paying such expenses.
What Is The Best Type Of Life Insurance For A Key Man Policy?
When considering the purchase of key man life insurance, the best type of policy to buy will depend upon several factors. These will usually include the goals of the company, as well as the age and health of the key executive.
Criteria will also include the size of the business, the amount of death benefit required, and whether or not the company has a need for a cash value build up component versus just pure life insurance protection.
If you are a running a specialized agency then you may have a trade organization that can get you special coverage. For instance, accountants can get AICPA life insurance policies and they may be able to provide a key person policy to meet the needs of an accounting firm.
The final component will be how healthy is the person who is being insured. If the insured is in poor health you may have to opt for life insurance with no medical exam. These policies only have a health questionnaire, but do not require you to go through the blood work and physical.
No Medical Exam
When you’re looking to get key man life insurance for your business, it’s important that you get the best life insurance plan. If you’re in poor health or you have several pre-existing conditions, then a no-medical exam could be best. As you can guess from the name, these plans will allow you to get life insurance without an exam.
If you’re looking to get life insurance through a no medical exam, these plans are going to be much more expensive than a traditional insurance plan. The purpose of the medical exam is to give the insurance company an idea of how much risk that you are to approve for coverage, and without that medical exam the insurance company is going to take a much greater risk, which will cause your monthly premiums to be higher. If you looking for a certain price range within your budget, you’ll need to apply for a traditional plan.
Another significant disadvantage is that you may be limited on the amount of coverage you can buy. Most insurance companies only allow a no medical exam policy to be purchased up to $250,000 worth of coverage and for many families, this will not be enough protection, which could leave your loved ones with a massive amount of debt and other final expenses.
There are a few advantages to these no medical exams, and the biggest one is that you can get life insurance coverage much faster than you would with a normal plan. With a normal life insurance policy, you’ll have to wait for the insurance company to review your medical exam results, which could take several weeks. With a no medical exam, you can be approved for life insurance coverage in a matter of days. If you’re wanting to get life insurance protection as quickly as possible, a no exam policy is going to be your best option.
Getting Your Business Protected
Life insurance is one of the best safety nets that you could ever provide for your family, but it’s also one of the best investments that you’ll ever make for your business. If something tragic were to happen to you, your family would be left with a massive amount of debt and it could cause your business to suffer or maybe even go bankrupt.
We know that finding a quality and affordable key man life insurance plan can be a difficult task, but it doesn’t have to be. We can help connect you with the perfect plan to meet your needs.
If you’re ready to protect your business with key man life insurance coverage, you can start by obtaining quotes from several highly rated life insurance companies. By taking a brief moment to fill out the quote from on this page, you can determine which insurer can provide you and your company with the protection that will best suit your financial needs and goals.
If you have any questions about key man insurance or about some of the other options for life insurance coverage, please contact one of our agents today and we would be happy to answer those questions. It’s our mission to ensure that you’re getting the best insurance plans to meet your needs. As independent insurance brokers, we can help you compare dozens of insurance rates without having to call all of the companies yourself. Contact us today and we can get the process started.