How Does Key Person Insurance Work?
Have you heard of taking out life insurance on a key employee or partner, or on yourself as the proprietor of your business? The continued successful operation of your company may depend on it. If you have key people whom you see as crucial to your firm — workers whose absence would sink the company — you may want to consider taking out key person insurance on them.
Here's how it works: You purchase a life insurance policy on a key employee and pay the premiums. Your company is the beneficiary. If that employee dies, your firm will receive the insurance payoff.
What about the disability of a key executive? Key person disability insurance offers benefits payable monthly or as a lump sum after a specified waiting period — 30 or 60 days for monthly payments and 12 or 18 months for a lump-sum payment.
You should consider purchasing key person coverage if your business:
You can use the proceeds from the insurance for expenses until you find a replacement and train him or her. You could use the money to pay off debts, or you may want to distribute the funds to investors. Other uses may be to pay severance to employees and close the business in an orderly fashion. In a tragic situation, key person insurance gives the company options so you don't have to face bankruptcy.
Do you feel that there's an employee whom you consider irreplaceable in the short term? This person — maybe a partner — keeps the books, manages the employees and handles key clients. If that person is gone, the business pretty much stops.
What factors should you consider?
The point is, for the health of your company, and your estate plan, you should consider key person insurance.
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