Key person insurance is the premiums paid to an insurance company to protect a company’s financial interest in case the key person is disabled or dies. A key person is a significant contributor to business success. So, if the key person is met by untimely death or disability, there is a high possibility of the business to fail.
But, suppose the company had the key person insurance, the company would get paid, and that amount would be used to stabilize the company.
The following are other reasons why a key person life insurance policy is essential.
- Train and employ a new replacement
Finding an employee who can resume duties of another lost employee is difficult and time-consuming. It becomes more complicated when the replacement is not as suitable as the lost employee, and you have to train them to match your requirements. But, if an insurance company pays up, the company will use the money to instill the required knowledge for running the company to the new employee.
- Protecting assets
Assume the key person of a company is the owner and the manager. It means he is the one running essential details like mortgages, loans, and real estates. Now suppose the manager dies and you are the significant lender towards operations of the company. You will rush to get your money back because you don’t know the future of the company anymore. But if the company uses the insurance payable to settle some of your money, you will be confident to continue supporting the company. Now, you understand the importance of key person life insurance policy. When the company uses the insurance policy, its assets will remain intact.
- Protecting other owners
When the key person dies, his interest is supposed to be inherited by immediate kin. Now, if the company lacks the insurance policy, it will have to liquidate some of its assets to pay the deceased family. But, if the company had a key person life insurance policy, they will use the amount to pay the family.
Note: sometimes liquidating the company’s assets means the company has to die. Imagine paying a key person’s family its interest, and it’s a lot of money which might collapse the business. As co-owners of such company, it’s advisable to protect your interests and the company at large.
- It ensures continuous cash flow
Suppose the key person is involved with all financial. It means he is the person who meets with the lender and investors. Even though he uses the company name to get the finances, it becomes difficult to tell those lenders that you’ve replaced the key person because he died. As the crucial new person, convincing the lenders will be difficult because they don’t know you to begin with. You have to create a connection with personal lenders. Meanwhile, the company has to keep running, and the insurance policy paid to the company can solve a financial hitch.
- Lenders requirement
A growing business might need financial support from banks and other lending institutions. If the success of the company using the money is tied to a key person, then the commercial lenders require the key person to be insured so that they can recover the money which they lend the business in case the key person dies.
Life insurance policy is essential but make sure you research on the types of insurance plans before you purchase one.