Not everybody needs key person insurance, but it’s crucial for those who do. So how do you know if you’re one of those people that can get by without it, or if it’s worth an investment?
Key person insurance, also sometimes referred to as “keyman insurance,” is a type of business insurance with no technical legal definition. To put it simply, though, it’s a life insurance policy of sorts that a major corporation will take out on an owner, high-level executive, or other VIP within the company. This kind of insurance is valuable if the passing of that person would strike a financial blow to the company.
Who Should Consider Key Person Insurance?
Those who may benefit from key person insurance include anyone with contracts within a venture capitalist firm, private equity, and similar that require it. If a person’s friends or family members have personally invested in the business, then key person insurance can help them stay protected.
Key person insurance benefits more than just the company owners. It also protects any valuable employees or personal investors if something happens to a key person within the company.
For example, if your firm works with software development, there tends to be at least one person who stands out from the rest because they have a lot of crucial ideas and information. If something happens to this software development employee, the business would take a significant hit. All of the code, information, and plans for where their project is going may disappear, and that’s on top of losing their valuable and ongoing input.
How Does Key Person Insurance Help?
If something happens to a person who is integral to your operation, it could become a serious setback. Replacing this person may take time and money that you don’t have. While you can’t do much about the time required to find a replacement, the money from a key person insurance policy can expedite the process and help the company remain on its feet financially.
If something were to happen to the owner, and they passed away unexpectedly, their estate would need to be paid off per the agreement within the shareholders’ policy. If you aren’t adequately prepared for this cost, coming up with the funds for that can set your business significantly behind. Key person insurance can prevent that from happening.
