Having an insurance policy covering either you as the key person of a company or your employee is an essential investment for your company. It saves a break-up situation of your company in case diseases strike you and you are no longer able to run the business.
It is therefore essential to understand the need of having a key person life insurance policy for either you or your key person employee. Consequently, you need to understand what it entails so that when you walk toward having one, you will be knowledgeable enough.
The good thing is, you can contact an insurance group and inquire about all the information you need.
Here is some of the information you need to know.
1. Identify the key person in your company
Ask yourself the following questions
- Who is that person whose demise would affect the continuity of your business?
- Who is that one employee that will be difficult to find a replacement
- Does the key person affect loan approval
The death or sudden disability of a company owner means the business will halt or die depending on the people left behind. If you want your legacy to continue even after your death, it’s essential to acquire a key person life insurance policy to stand in the space of your absence for some time before the business is up and running again.
If the key person of your company is a sales rep, your clients know him as the pillar. He is the one client’s approach and makes deals with. They trust him. So, his death will cause the business to crumble before you meet a person as right as he was. In that case, the insurance policy covers the losses as you find a replacement
Additionally, if you are the business owner, money lenders will require you have a key person insurance policy that will cover the loans if you die before the loans are paid.
2. Amount of key person insurance policy
Three factors determine the amount you pay for the key person insurance policy without straining the company.
What is the amount in percentage does the key employee bring to the company? That amount should be multiplied by the number possible years it would take to replace them. That means in case the key person dies; the insurance should cover the profits that could be made before replacing the key person.
The income of the key employee
How much does he earn? The amount could be multiplied by a certain number to come up with the amount you expect to be paid by an insurance company.
How much will it cost you before you find an ideal replacement? How long will it take? If you have to recruit, train and modify the employee into what you need as a key person running your business, it will take time and money. You have to invest in his training, his conferences as he attends them to gain specific knowledge. All this time, your business is not making an optimal profit, but you can use the insurance money to cater for his training and cover some losses in the business.
Note: An insurance company takes part in the remaining part for determining factors affecting key person insurance. It includes underwriting and the actual plan you buy. Look out for information on that.
Buying an insurance policy is tasking, but you can always refer to an insurance company for advice and testimonials on the same. Good luck.