What is Key Person Insurance?
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When it comes to running a business, there are always risks that need to be addressed. One of the most significant risks is the possibility of losing a key employee or owner. If the business is not prepared, this can be a catastrophic blow. This is where Key Person Insurance can help.
What is Key Person Insurance?
Key person insurance, also known as ‘key man insurance,’ is a life insurance policy taken out on a key employee or owner of a business. In the event of the key person’s death (or sometimes disability), the policy pays out a lump sum to the company. This can cover expenses for new recruitment, settle debts, or provide a safety net during a difficult transition period.
Why is Key Person Insurance Important?
Like any insurance policy, the goal is to protect from the unexpected. The ultimate goal of this policy is to protect a business from the financial consequences of unexpectedly losing a key employee or owner. Here are a few reasons why key person insurance is critically important for a business.
Financial Security
As mentioned earlier, financial protection is the most important aspect of key person insurance. It protects the business against the unexpected economic consequences of losing a key person.
Business Continuity
The loss of a key person can disrupt daily operations. The support from this insurance ensures that the business can continue to operate and meet its obligations.
Creditworthiness
Some lenders require key person insurance as a condition for loans if the business’s success heavily depends on the key person. This insurance can help a business continue its access to funding and maintain its creditworthiness.
Attracting Investors
Investors may view a business with key person insurance as more stable and reliable as the company has already taken steps to mitigate unexpected risks.
Succession Planning
The business can use the proceeds from the insurance to buy out the shares of the deceased (or disabled) key person. Thus, it can be important for an unexpected ownership or succession transition to be successful.
Deciding if Key Person Insurance is Right for Your Business
Key person insurance is an important tool to protect your business from the financial impact of losing a key employee or owner. Without it, your business could be left vulnerable to a range of detrimental factors.
Have questions about whether adding key person insurance to your business’s insurance is needed? Contact Us to meet with our team of expert insurance.