A key-person term life insurance policy, as the name suggests, covers the key person in the company. For small businesses, the key person in the company can be its founder, owner or any key employee that contributes significantly to the business. The beneficiary of such an insurance policy is the business itself, and in case of the death of the policyholder, the claim amount is used to help the business move on in the absence of the key person and take care of the necessary expenses to find the replacement on an urgent basis.
Features of Key Person Life Insurance
- The proceeds from the claim amount of key person life insurance policy help in replacing the key person and finding a substitute, temporarily or permanently.
- The business may also suffer from a considerable loss due to the death of the key person and the policy helps in recovering from some of it. The key person may have been in the process of closing and managing several deals and projects and the demise can lead to a delay in such projects or even be the reason for lost sales. In any case, the insurance claim could help in covering some of these losses.
- The claim amount of the key person life insurance can actually help in buying out the stake of the deceased member of the company. Repurchasing the stock of the key person is not always immediately possible from the existing and current cash flow of the company, but with the help of the claim proceeds, it becomes easier to perform extensive shareholder buyouts.
- When the owner or a partner is covered by the key person life insurance, it becomes easier for the businesses to pay off any business loans that are in their names or have loan guarantees attached to the business. The insurance is considered as an asset by financial companies and at times, also helps in borrowing money from them.
- In case the business is bound for closure after the death of the key person, the proceeds from the insurance policy can help in paying off the company’s debt, offer severance to the employees, pay for essential closure formalities, payback to the investors, and move ahead with the business closure systematically. It would save the business from being bankrupt or going insolvent abruptly.
- It helps in increasing the chances of getting financing since venture capitalists need a good amount of assurance that their investment will be safe in case something happens to the key person. The Key person term life insurance policy provides them with that assurance that the company will continue to operate, no matter what happens.
- When companies take out key-person life insurance for a few employees of the company, it boosts their morale. They feel as if the company considers them as an asset to the company, allowing them to feel connected to the company, increasing satisfaction, and productivity at the workplace.
- Key-person life insurance policy does not have a lock-in period, allowing the owner of the company to take out the plan for a few key persons without having to worry about the long term cost. They can cancel payments whenever they want and not have to keep paying premiums even if the person in question has left the company.
Even though key person term life insurance policy is quite a simple concept, not many businesses are utilizing them. It is vital to read more about the benefits and advantages of such insurance plans so that business owners and entrepreneurs can use them to their advantage.