Is Key Employee Insurance Critical To Your Business?

Key employee insurance is usually purchased on one or more key people in a business to protect the business from the economic loss associated with an untimely death. The company buys the insurance to cover the life of the key person and is also the policy beneficiary.

In the event the key employee dies, the business receives the lump sum policy proceeds that can be used at the company’s discretion to stabilize the company until a replacement employee can be found. But does your company need this kind of key person life insurance policy?

Let’s dig deeper.

Key Concerns Of Employees To A Business

Once the need for key employee life insurance has been established, there are a few questions that should be answered before you begin to shop for a policy. The answers to these questions will be helpful in determining the type of insurance needed, the amount of the policy and how long the policy should be maintained.

• Why are you considering key employee life insurance?
• What are the contingencies for the company if a key employee dies?
• Would the business continue operations or liquidate or be sold?
• Can a capable replacement employee be easily located?
• How much will it cost to locate and train a replacement?
• What type of compensation will it take to hire the new employee?
• What percentage of revenue is directly attributable to the key person?
• Would the key person’s death result in the loss of clients?
• Is the company willing to self-insure?
• Where do I locate a competent professional insurance agent that has experience in working with companies such as ours?

The answers to the questions above will providing a good starting point in your efforts to secure the best key employee life insurance policy.

Types of Key Employee Insurance

There are two basic types of life insurance used for key man life policies: term life insurance and permanent life insurance. The type of policy used depends on the specific needs of the business. For example, start-up firms that do not have steady cash flows would use term life insurance because of its relatively low cost and flexibility.

On the other hand, more established companies with significant earnings may select universal life or whole life insurance as these policies build cash value which is an asset on the company’s balance sheet and can be accessed anytime at the discretion of the company.

Checklist for Shopping

When shopping for key person life insurance there are several critical questions you should ask your agent or broker. Without a fair “apples to apples” comparison, you can easily select a policy that doesn’t adequately meet your needs. Below are just a few of these “key” questions:

• Is the policy premium competitive? Shop around and make sure.
• Are the premiums for the insurance guaranteed and for how long?
• How much key man insurance do I need?
• Is the insurance company financially sound?
• What are the qualifications to obtain the policy?
• Does this policy generate any cash value?
• What is the process of applying for key man life insurance?