7 Reasons Why Keyperson Insurance is Strongly Recommended for Your Business
Let’s delve into a vital form of insurance: key person insurance. Often referred to as keyman insurance or key employee insurance, this specialized coverage provides financial support to businesses facing the loss of an essential employee. By understanding the significance of key person insurance and its potential benefits, you can protect your business from potential financial ruin and ensure its stability in times of crisis.
What is Key Person Insurance? Key person insurance is a specialized insurance policy designed to protect a business in the event of the sickness, disability, or death of a crucial employee or owner. This type of insurance provides much-needed cash when the business faces its most challenging financial moments. Without key person insurance, a business could face severe financial repercussions and struggle to recover.
Identifying the Need for Key Person Insurance: Any company that relies on one or more individuals crucial to its success and profitability should seriously consider obtaining key person insurance. If a significant event were to happen to these key employees, the impact on the company could be devastating, leading to financial instability and potential ruin.
Key Person Insurance vs. Buy-Sell Insurance: While key person insurance and buy-sell insurance serve different purposes, they are not mutually exclusive. It is possible to have a policy that fulfills both objectives. Buy-sell insurance facilitates the buyout of shares from a departing partner, while key person insurance compensates the business for the loss of a vital employee or owner due to death, disability, or sickness. While the proceeds from buy-sell insurance go to the departed shareholder's family or estate, the funds from key person insurance remain within the company, easing cash flow concerns during a challenging period.
Reasons Why Your Business Needs Key Person Insurance:
Financial Stability for the Business: The loss of a critical employee can have substantial financial repercussions, affecting profitability, operations, morale, and customer confidence. Key person insurance provides an influx of cash that can be a lifeline for the business, enabling it to find a replacement or buy time for restructuring.
Investor Confidence: Investors often require key person insurance to ensure additional funding when seeking third-party financing or credit from banks. This coverage demonstrates that your business has a contingency plan to mitigate risks associated with losing a key employee.
Maintaining Cash Reserves: In the absence of key person insurance, a company that has never encountered financial issues could suddenly find itself struggling to make payroll or pay bills. Financial institutions are less inclined to extend credit terms or increase lines of credit when a company loses a critical individual vital to its financial viability. Having key person insurance in place helps maintain cash reserves and improves the business's overall financial stability.
Maintaining Employee Confidence & Stability: The loss of a key employee is a tragedy for any organization. Employees will assess their own job security in the wake of such an event. If the company communicates that it has key person insurance to protect against such occurrences, employees' fears will be alleviated, fostering loyalty and stability within the workforce.
Protecting an Owner's Assets: Business owners often use personal assets, such as homes or investment assets, as collateral to secure bank loans or operating lines of credit. Without key person insurance, the business runs the risk of losing not only the company but also the owner's pledged assets.
Future Wages for Owners: For business owners, the loss of a key employee jeopardizes the business and their future income. Unlike employees, owners cannot simply quit and find another position elsewhere without severe consequences. Key person insurance ensures that owners have financial support during challenging times, preserving their future wages.
Possible Asset Building with Permanent Insurance: When obtaining key person insurance, you have the option to choose between term insurance and permanent insurance. While term insurance is commonly used for key person coverage, permanent insurance offers the additional benefit of building a significant nest egg within your business. Permanent insurance policies have a cash value component that grows over time. As the cash value accumulates, the business can utilize it as a homegrown line of credit or borrow against the policy, providing further financial flexibility.
Conclusion: Insurance is often viewed as an unwelcome expense, but its purpose becomes evident when faced with unexpected catastrophic events. By securing key person insurance, you protect your family, your business, and your future from potential devastation. The random and unpredictable nature of life events leaves no one exempt, and waiting until it's too late to obtain coverage can leave you ineligible for protection. Be proactive in safeguarding your business by considering key person insurance and the peace of mind it can provide.
If you're interested in learning more about key person insurance and its cost for your business, don't hesitate to reach out for further information. By taking the necessary steps to prepare for unforeseen circumstances, you can ensure the long-term stability and success of your business.
