Learning Center -> Life Insurance

What is key person insurance and how can it help companies mourning an owner or executive?

Every business has at least one employee who everyone thinks is priceless. Maybe this person builds your business, or maybe he was the one to make the coffee for everyone every single day for years. Whatever his special quality may be, your business is probably going to be very upset if you lose him.

"Key person' life insurance policies name the business or the corporation as the beneficiary if this key person were to die. They key person is the one person that keeps this business going. If you lose the key person, your business is going to stumble or might even fail. That's basically who the key person should be.

Mark Johnson of Johnson Insurance Consultants in Duluth, Minn., and past president of the National Association of Insurance and Financial Advisors claims, "In some cases, small companies think they need key person insurance, when they probably don't.'

Stacy Wolfe, vice president and counsel at New England Financial, claims, "Key person insurance used to be stressed quite a bit by insurance companies. Now it's not talked about as much, but it's not because there's less need. A lot of people just don't believe that they're going to die, but the fact is that the key person is frequently the brains of the corporation, and a critical individual can't be replaced without paying more and going through a struggle.'

Before purchasing key person insurance, here is what you should examine:

• Who is the key person going to be? You have to be completely sure that they key person is the person who is the most responsible for your business.

If you want to change the key person later, you probably will have the chance to do so, but it is going to take some time of yours. Making sure that they key person really is the most important is really crucial for a company. Keep in mind that you are listing yourselves as the beneficiaries, not the key person.

• How much debt are you carrying? In case your company experiences some sort of financial setback, some form of insurance to cover loan or line-of-credit payments is usually required by most banking institutions.

Keep in mind that key person insurance is redundant if you've already got credit insurance loans. Don't purchase coverage that you don't need or coverage that will later bring more debt to your business.

• Do you have a detailed business-continuation plan? You should know what you are going to do after the key person passes away. If there is going to be a financial or management disaster, a business-continuation plan will be like an outline for what you are going to do next.

Before even considering key person insurance, it is highly crucial to have a plan like this. Even if your business or company is flourishing financially, it is bound to be in trouble without a detailed plan covering every aspect of the company's business.