key person life insurance

Protecting Your Business from Catastrophic Loss

Key person life insurance is meant to protect one of the greatest assets of a company: Their people. For small businesses, the owner, proprietor or managing director may be an integral part of the business. For mid-sized to large enterprises, there may be several key employees that have intimate knowledge of the industry, clients and detailed aspects of the company. The sudden loss of one of these key people can have catastrophic results on the bottom line.

The purpose of this type of policy is to protect the company from an unexpected, steep decline in revenue as a result of the loss. It helps keep the company afloat until a replacement can be found and trained. Key points include:

  • The business pays the premiums.
  • If a key person dies unexpectedly, the money from the policy goes to the company.
  • The policy’s term ends with the key person’s employment.

How Much Coverage is Needed?

A key person life insurance policy may be approved for up to five to ten times the employees’ salary. Age of the key person, the net worth of the company and age of the business may also be factors. In general, companies purchase as much key person insurance as they can afford. Quotes between $100,000 and $1,000,000 are common. Before taking the insurance, it’s important to consider what it will take to keep the business going while a new key person is found and brought up to speed.