Life Insurance For Key Employees A Smart Investment for Business Continuity
Who Is a Key Employee?
A key employee is one whose expertise boosts your company’s profits. The loss of a key employee will have major negative financial effects on your company. A National Association of Insurance Commissioners study found that 71% of small companies rely on a few key people for success. However, only 22 percent had life insurance for the key person that was in place.
What Is Key Employee Insurance?
Life or disability insurance will pay your company if certain employees die or become disabled. These insurance policies ease the financial strain of losing a key employee.
How Much Life Insurance Is Advisable?
There is no standard method to value the impact of a key employee’s death on a company’s finances. But, you should find a figure to guide you in determining the amount of insurance coverage you should purchase. Some insurers offer formulas to help you. But, they may not accurately relate your employee’s worth to your company.
In some instances, looking at the responsibilities of the employee may help in the valuation. If the employee is accountable for a specific amount of sales, the loss will be the profit from those sales. It will be less than the profit from replacing the employee.
The estimated cost of replacing the employee is included. This includes employment agency fees, moving costs, and a higher salary for the replacement.
Who Owns the Life Insurance Policy?
Typically, your company owns the policy, pays the premium, and is the beneficiary. In other cases, your company and a key employee may agree to split the premium, cash surrender, and death benefits.
The employee must agree with the insurance company’s purchase. The insurance company may also require the approval of your board of directors that outlines the purpose of the policy.
What Kind of Life Insurance Should I Buy?
Companies use term insurance to pay for the loss from an important employee’s death. Policies that create cash value are suitable in certain circumstances. Discuss which one is best for your company in conjunction with your insurance broker.
What Is Key Employee Disability Income Insurance?
Key employee disability insurance isn’t as popular as life insurance. It is much more likely that a key employee will become disabled than die. If a key employee is permanently disabled, your business would suffer as if they had died. Key employee disability insurance protects the company. It pays 40-70% of the disabled employee’s income.
If the disabled person is a sole or partner proprietor, the business overhead expense disability policy offers some protection. The policy pays up to a maximum limit set by the policy office expenses, including rental, utility bills, and depreciation, which are paid even when an owner or sole proprietor is disabled.
