Do you need key person insurance?
Key person insurance helps to safeguard all businesses, big and small, if a key person were unable to continue to fulfil their role.
Every business has key people within their operation, without whom the business would falter. This is usually the CEO and high-level managers. However, unexpected eventualities do occur, and your business should be prepared if the worst were to happen.
What is key person insurance?
Key person insurance is, effectively, a life insurance policy taken out on a person that the business depends on. This might include:
- Owner(s)
- Founder(s)
- Senior employees
Providing premium payments are kept up-to-date, the policy should pay out to the business in the event of the unexpected death of the named key person.
Key person insurance is especially relevant to small businesses with fewer employees.
Key person insurance makes small businesses more resilient
In a small business, the death of a key person could spell the end for the entire company. Adopting key person insurance enables small businesses to take the following courses of action and avoid immediate bankruptcy:
- Use insurance proceeds to cover expenses until a replacement staff member can be found.
- Pay off business debts and employee severance, distribute a sum to investors and close down the business.
Key person insurance is available from most life insurance agents, and it pays to shop around. ‘Term insurance’ is often preferable to ‘whole life’ or ‘variable life’ policies as the latter tend to have higher premiums and few additional benefits.
The size of the policy should be determined by an estimate of business costs in the period it would take to appoint a new key person to the role.
Call on the friendly 3 Wise Bears team for more expert small business accounting advice.
