Businesses need money to sustain in a constantly fluctuating market where demand and supply is dynamic. A regular cash flow, keeping credits in check and debits as low as possible is the way forward for any business owner and his or her business partners. It’s not just skills but a sufficient capital that keeps the business running. Without proper succession planning, especially in the event of premature death of the business owner, the business’s assets may have to be liquidated. It can even lead to the business being sold and the pending debts can weigh down on the owner’s family members; thus, crushing the owner’s family members under the burden of huge debts. If you are a business owner such that your unfortunate death can pass on your business’s debts to your family and you don’t want it to happen then it’s necessary that you have a Life Insurance Policy in place. It also helps your business to function smoothly in your absence and make for the necessary capital required to sustain the business.

What do you mean by key person insurance?

If you are a business owner, your business needs will be different from that of an individual looking for life insurance coverage for his family. In the latter, the individual may look for a personal life insurance policy that can replace his income and secure his family’s needs. In the event an owner, partner or key employee dies, it’s the payment on their life insurance that can ensures that the business continues.

Many businesses can identify an employee who is crucial to their continued profitability and success. If you can identify this type of employee, then key person insurance is important to help protect your investment as well as the future of your company.

Key person insurance is life insurance on the key person(s) in a business, without whom the business would struggle. A business may apply for coverage on any key person, and it’s an effective way to help keep a business going in the immediate aftermath of that individual’s death or prolonged absence.

Using key person insurance, a business receives money after the employee dies or becomes disabled. These funds can help offset any short-term losses the business suffers as a result of the person’s passing, and help to give the company an opportunity to rebuild and sustain.

How does key person insurance work?

When a business gets a key person life insurance for an employee, the business becomes the beneficiary. So, should the insured key person die during the policy period, it’s the business that is entitled to receive the policy’s benefits. Hence, a company-owned life insurance is one of the ways to help the company swim through financial problems as a result of the unanticipated death of the insured key employee, partner, or co-owner.

Let’s see the various ways in which key person insurance and life insurance come handy:

1. Financing a buy-sell agreement

A buy-sell agreement determines well in advance as to what will occur in the event the key person leaves the company or dies. The death benefit from a company-owned life insurance policy can be used by the company to buy the decedent’s shares in the company from his ancestry.

2. Keeps the business up and running

In the event of the business owner’s uncertain death, the business may face a period of pause where operations cease to function while the survivors determine the way forward. During this period, the death benefit received from the decedent’s life insurance policy can help the company to catch up with lost revenues and pay debts like rent, utility bills as well as dole out salaries to the workers. Moreover, it will help the business to avoid piling up their debts by switching to more and more borrowing or selling precious assets.

3. Helps families with regular income

A business owner may have family members dependent on the income from his business, which may cease to continue should the owner die. In this case, the company-owned life insurance comes handy in replacing the lost income thus securing the family’s quality of living.

Conclusion:

The cost and availability of life insurance for business owners depend on factors like age, health, and the type and coverage needed. Before deciding on a certain life insurance, it’s important to ensure that the individual is eligible for insurance as there are expenses linked to the purchase of life insurance. Business owners also need to consider contract limitations, fees, and charges including mortality and expense rates. Additionally, it’s also important to consider surrender charges and income tax implications should the policy is surrendered in advance.

It may also be advisable to buy critical illness rider along with the Life cover  for the similar reasons stipulated above.