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Key person life insurance differs from typical life insurance in that with life insurance, when the insured party passes away, usually a family member or close friend will be the beneficiary to the policy. With key person life insurance the contract provides financial protection for the loss of a company owner, a business partner or a key employee, in which case the company is the beneficiary of the insurance plan.
In fact, a key person can be any person who is essential to the day to day operations of the business. Should they be absent, there might be very serious repercussions. Where larger companies are concerned, a key person may be an excellent salesperson, an executive, or perhaps a principal shareholder. Whereas for a small business, a key person would be the owner, a partner, the founder, or perhaps a particularly good employee.
The way key person insurance works is that the company purchases the policy and pays the premium and thus they become the beneficiary. Obviously this type of insurance is important to the health of a business because should a business – either large or small – suffer the loss of someone very important then the business can decline very rapidly.
The proceeds of key person insurance can be used to cover various expenses whilst the company endeavors to locate a replacement for the key person. A small company may offer to buy shares in the business from the family of the deceased employee should the family own the business outright and have shares available.
Nevertheless, there are other ways the funds can be used such as the allocation of money to investors, paying off some outstanding debts, paying separation fees if necessary, or to close the business down should the loss of the key person prove to be insurmountable.
Sometimes, should a company wish to apply for a business loan, the lender may require key person life insurance before the loan is granted. This way either the lender or the company will act as the beneficiary thereby providing a guarantee that the loan will be paid off regardless of a key employee dying or the company suffering from liquidation of its’ assets.
Obviously not all businesses need life insurance for a key person. In order to determine if there is a need, an assessment must be made as to who is irreplaceable. In a small business, the owner is normally (although not always) seen as the individual who holds the business together and keeps it running smoothly. Their function could be to deal with important customers, manage staffing issues, possibly maintaining the books or perhaps everything together. Without the owner, the business will probably cease to function efficiently and may collapse altogether.
The cost of key person insurance will depend on the business. The insured sum can vary between a few thousand dollars to many millions of dollars. The business needs to consider how important this form of insurance is. Only then will they be able to assess the appropriate investment.
Example: Monthly average costs for a 20 year term life policy for a male non-smoker key person in his fifties:
|Key Person Age||$100,000||$200,000||$300,000||$500,000||$1,000,000|
|50 year old man||$27.33||$45.50||$54.58||$89.35||$170.00|
|51 year old man||$28.97||$49.95||$58.54||$ 97.91||$185.12|
|52 year old man||$31.28||$54.25||$64.65||$105.65||$ 204.99|
|53 year old man||$33.92||$58.85||$67.85||$115.90||$227.20|
|54 year old man||$35.88||$63.90||$71.90||$118.55||$233.20|
|55 year old man||$37.59||$67.43||$77.15||$131.20||$255.90|
|56 year old man||$41.62||$71.59||$86.90||$143.95||$283.15|
|57 year old man||$44.55||$81.80||$93.30||$156.80||$308.98|
|58 year old man||$51.92||$98.52||$121.65||$196.90||$388.15|
|59 year old man||$58.15||$108.55||$137.40||$223.15||$435.05|