For almost anyone, the topic of life insurance cover can be an uncomfortable one to discuss. However, life insurance can be a critical issue for businesses both large and small.
Why is key person life insurance important for businesses? Here are a few reasons why:
Reason #1: To Ensure the Survival of the Business
In many companies, there are one or more persons who are critical to the continued success of the business. For example, the owner of a small business or the majority shareholder of a corporation. Without these key persons, the business would cease to exist, or at the very least the ability to do business would be severely hampered.
Key person life insurance covers the business in case of the loss of an irreplaceable member of the company. When a key person covered by such insurance dies, the company is the beneficiary of the policy, and can use the money to make up the shortfall in operations until a suitable replacement can be found and brought up to speed. In this way, life insurance for key personnel helps to ensure the continued survival of the business.
Reason #2: To Pay Debts and Avoid Bankruptcy
One of the major risks of a key person dying is that the company as a whole might die with them. In many cases, companies might have to file for bankruptcy, as they run out of funds with which to pay off debts such as bills, taxes, and payroll.
That last item in the list above is especially important as a means of keeping employees motivated. With key person cover, a company can let rank and file employees know that, in the event of the death of the company owner or some other person, their final paychecks/severance will be secure as there is an insurance policy in place to cover the expense. This gives other employees peace of mind so that they don’t have to worry about their financial future if one person’s health takes a turn for the worse.
Reason #3: To Reassure Investors
This is closely linked to reason number two for having key person cover. As much as employees like knowing that their severance packages will be funded in case the company loses a key person, investors like knowing that their investment is secure as well.
Savvy investors like to make sure that their bases are covered before pouring money into a business, which includes checking to see that measures are in place to retrieve their investment capital in case the business suddenly becomes nonviable. One such critical measure is key person insurance that can be used to pay back investors in case the company has to close following the demise of an operation-critical employee.
Having key person cover helps investors to make their investments with confidence in the knowledge that they’ll be able to recoup their investments in a worst-case scenario.
Who Needs to be Covered in Your Business?
Now that we know a few reasons why your business might need key person cover, who in the company should be covered? Naturally, you shouldn’t need key person cover for every single employee, as that would be a little excessive.
To figure out who in your company should be covered under key person life insurance, consider the following:
- Who is responsible for your company’s direction?
- How difficult would it be to replace this person?
- How much value, on average, does this person generate for the company annually?
- Does this person have personal contacts that enable your business’ operations?
The above are just a few examples of things that you might want to ask about an employee when considering if they should be covered under a key person life insurance policy.
For more information regarding key person and shareholder cover, contact Simon Shirley Advisors today, or check out our employee benefits options guide at the link below: