As a business owner, you may employ at least one individual who is essential to your success. This person may be a partner or have a unique expertise that’s unmatched.
If this key person dies, your business can be exposed to financial risks.
In this scenario, key person life insurance can protect your business. Here’s how it works:
- You purchase a key-person policy on the key individual(s).
- You are the beneficiary of the policy, and apply for and own the policy. If the key employee dies prematurely, the policy pays out to you.
- In some cases, IRS guidelines allow for tax-free dollars from the policy to be put towards finding, hiring, and training a replacement employee, compensation for lost business during the transition, and financing timely business transactions.
- Depending on the specific language in the policy, it is a helpful tool to retain talent, as the business can pay the premiums for a designated number of years and then turn it over to the key employee along with its cash value. This is a good way to keep a key person from moving to another restaurant if they know they have deferred compensation down the line.
- The policy can be used to buy out the key employee’s shares or interest in the business.
Premiums for the policy are based on several factors, including the key employee’s age, physical condition, and medical history. The amount of coverage also affects the insurance rate.
Considerations
If losing one or more employees would have one of the following consequences, key person life insurance could be right for you:
- A reduction in your earning capabilities
- The loss of a specialized skill
- A disruption in everyday business operations
Be prepared—consider key person life insurance to reduce the backlash in the event that one of these key employees leaves prematurely. Email me to learn more.
Please know that we are here to guide you through the confusing maze of insurance options to find the right fit for you, your family, and your business. Email us today to learn more.
