Key person life insurance provides a wonderful advantage to a business need that often goes overlooked. This is the type of situation not really given much thought until a major crisis occurs that could negatively impact your company. Knowledgeable estate planners and insurance professionals may ask you if you have considered purchasing such a policy, not as a sales pitch, but because they realize that having it will be to your benefit, as well as that of your company.
A common scenario for many businesses is that they have a person, or persons, who are responsible for a vast majority of the business revenues. Often, a business partner can easily be identified as a key person in the organization. Key person insurance merely seeks to identify persons possessing a skill set that is valuable to the business and difficult to replace. The goal for key person insurance is not to facilitate a buyout, but rather, to compensate the business for the loss of that key person.
Factors in determining a key person
It actually isn’t all that hard to identify a key person in your employ, simply determine who is generating substantial profits for the business and for how long would these profits continue if that person fell deathly ill or was lost in a fatal accident. Whether this person is a key executive, key salesperson or key intellectual property developer, the revenue stream would likely suffer at some point after their demise.
Certain individuals may possess hard to replace skills that are vital to the business and would require training or hiring someone at a premium salary. For example, a top sales person, or an inventor or engineer would likely be highly skilled, and present added value to your operations, not often easily or quickly replaced. Other considerations in this equation are the cost of hiring a new person, including any travel, training, plus any lost opportunity costs during the transition period.
Key person life insurance is simply life insurance that will insure your company against the loss of a key business partner or key employee, so the decision to purchase a key person life policy necessitates making a choice about the type of insurance that would be most beneficial to your cause. Speak to an agent about any questions pertaining to this coverage.