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Key Man Life Insurance
Businesses are born when the market has a need, and someone has a great idea of how to meet that need. A product or service is developed and offered to a targeted audience. More people will discover the business and purchase the company’s offerings. As time passes, the company will grow and hire employees who depend on the success of the business to pay salaries that support their families.
Significant property loss is covered under business insurance, but what would happen if an owner or important employee is injured or passes away? Only 20 percent of all businesses survive the loss of a key player. Four out of every five businesses that suffer such loss will go out of business within three years. Some will close the doors of the business immediately.
Who is a Key Player?
A business owner with occasional involvement in the business might not be considered a key player. Business insurance providers can require insurance on the key players to reduce the risk of loss under the other policies. Experienced business insurance agents will encourage all business leaders to ask some significant questions in the effort to identify the employees and principals that must be insured.
• Who has the primary ownership interest in the company?
• Which person has the highest level of proprietary knowledge and product expertise?
• How would a comparable person be found to replace the lost employee or principal?
• What provisions are written into the partnership agreement that would require significant financial resources?
• How would legal bills be paid to execute the activities in the transition plan?
What Key Player Insurance Can Cover?
These important questions cause many people to shudder in the middle of the night. Any number of significant life events can cause significant loss for a business. Material possessions, buildings and vehicles can be replaced, but people are irreplaceable. Other individuals with comparable skills can be located and hired to contribute to the life of the business.
Prudence dictates that significant life insurance and disability insurance policies are purchased for every identified key player. Legal counsel and financial guidance must be drawn from the attorneys and accountants with oversight in the business. External counsel provides objective opinions that are non-biased. Some important expenses will arise following the loss of a key player.
• Transition plan expenses – While all key players are available, the transition plan must be written. Legal and financial considerations can be determined through meetings with the attorneys and accountants. Owners and stakeholders will have definite ideas of how the company would proceed under their personal leadership. Two separate plans can be written based on which player survives. Significant funds will be required to cover the expenses and business interruptions during the transition period.
• Buyout requirements – Partnership agreements can require that the surviving partner buy out the interest of the deceased partner posthumously. A portion of the funds from the insurance policy can be used for this purpose if the details are written into the transition plan. The family of the deceased partner would receive the proceeds of the buyout.
• Replacement personnel – A scientist with exclusive knowledge of a proprietary formula would be difficult to replace. Anyone with valuable knowledge that is part of the products and services offered by the company must be replaced. Recruiting, interviewing and relocating people is expensive. Sometimes employment contracts must be bought out to acquire the right people.
How Much Coverage?
Term life insurance allows the company to purchase significant death benefits that provide funds for expenses. Each company must determine the anticipated costs associated with the loss of each key player. A highly-involved business owner manages many details that affect the entire daily operation. Training a replacement for this individual, or hiring someone else, will require funds. Large companies will carry multi-million dollar policies on each key player. The annual premium is less expensive, and remains level through the life of the policy, Companies will compare the cost of the policy to financial loss they would experience if the business owner were to pass away.
Disability policies are essential for each key player since statistics reveal that the probability of becoming disabled is much higher than that of dying. A cancer diagnosis, or a serious heart attack, could render the key player unable to work for many months. The leadership must conduct important conversations to determine how this situation would be handled. While not discussed in open forums, these conversations must occur. The results must be documented and stored in a safe place. If your company takes out an SBA loan, life insurance to cover sba loans will be required. This is to insure repayment if the key player named on the loan dies.
Disclaimer About Key Player Insurance
Insurance policies purchased to cover the death, or disability, of a key player states that the beneficiary is the company or in some instances a bank. A bank would be named the beneficiary in the event the key player currently has a bank loan or exisiting line of credit. Life insurance for bank loan protection is used to insure the bank receives repayment on the loan in the event the key player passes away. Personal coverage to provide for family needs will be provided by the individual through their personal financial plan. The transition plan must be written ahead of time to prevent business interruptions caused by lack of funds. Anyone with responsibility for executing the plan must be willing to use the funds accordingly.