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Tuesday, 25 January 2022

Insuring against the loss of key personnel


Many firms, especially small enterprises with fewer workers, rely on the success of a single individual or a few key people. If a key employee is unable to work or dies, the company may lose important accounts or be temporarily unable to function, resulting in income loss.

The loss of a key employee may be devastating to a company's morale, but the financial damage can be reduced by purchasing key person insurance. This form of insurance can help a company keep paying its costs while looking for a new employee. In the sad event that a firm cannot exist without a key employee, key person insurance funds can be used to pay severance, transfer cash to investors, and end the organization in a timely way.

The business normally owns key person insurance and pays the rates. When asking for financing or credit, most banks and lending institutions demand this coverage.

Who qualifies as a “key person”?

When it comes to recognizing significant people in your company, there are no hard and fast rules. A key person is someone who makes a significant contribution to a company's bottom line or is essential to its operations. Here are several examples:

  • Heads of product development.
  • C-Suite Executives—such as a CEO or COO.
  • Engineers or other difficult-to-replace personnel.
  • Leading sales personnel.
Types of key person insurance

Key person insurance comes in the following two forms:

  • Key Person Life Insurance—This form of coverage varies from standard life insurance in that it only covers employees who are critical to the company's operations. It gives a financial infusion to the firm if a key employee is insured and dies, regardless of the reason or location of death. These money can be used to make up for income lost due to the death, as well as to pay off debts, buy out remaining shareholders' interest from heirs, and cover the costs of recruiting and training new employees.programs. Key person life insurance can be obtained as term insurance, which lasts for a certain amount of time, or as extended universal or whole life insurance, which lasts for an indefinite period of time. The amount of coverage is determined by the income of a key person, the overall revenue of the firm, and the part of revenue attributed to the key person.

key Person Disability Insurance—This coverage will pay out money to a company if a key employee is disabled and unable to work, either partially or completely. A key person disability policy offers funds to a firm to make up for lost income, the cost of finding a replacement employee, and other associated expenditures, whereas ordinary disability insurance covers an employee's lost salary and medical bills.The cost of premiums for key person insurance, like other disability and life insurance plans, is determined by the key employee's age, health, and job, as well as the risks the individual takes in their own life—for example, does the CEO fly her own plane?

Coverage for "first-to-die" key figures

A group of executives can save money on key person insurance by pooling their resources and purchasing a "first-to-die" policy that covers only the first of the group to die. After the first person to die is covered by the insurance, another member of the group becomes eligible for coverage. As a result, key person insurance remains in place for the new members of the leadership team, but rates are adjusted to reflect the reality that only one life is protected at a time.
When it comes to succession planning for your business, this sort of insurance may be a beneficial tool—and having a succession plan is critical to ensuring the successful transfer of your firm or business interests.

Individual and first-to-die key person coverage choices and prices can be discussed with your insurance professional.

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