What is Key Person Insurance and Why It is Important
Key Person (or Keyman) insurance is a type of life insurance policy taken out by businesses to protect them against the financial losses they would incur if a key employee or business partner were to pass away unexpectedly. This type of insurance is important because it can help ensure that the company can continue operating without major disruption, even in the face of an unexpected death or illness.
When key employees or partners are no longer able to perform their duties due to death or disability, it can have a significant impact on the business. Not only does the company lose that person’s skills and expertise, but there may also be other considerations, such as having to hire and train new staff members, recruiting and onboarding new partners, and losing potential profits due to decreased productivity. Having key person insurance in place can mitigate the risk of these costs and losses resulting from this occurrence.
Types of Key Person Insurance Available
There are two types of key person insurance:
Life Insurance
This type of policy is paid out upon the death of the key person and can be used to cover any debts or losses that occur as a result.
Disability Insurance
On the other hand, disability insurance provides financial protection if the key person becomes disabled and can no longer work.
How to Choose the Right Type of Key Person Insurance for Your Business
When choosing which type of key person insurance policy would be most beneficial for your business, there are a few things you should consider:
- Your key person’s salary and other compensation
- The type of positions they hold within the company
- The effect their death or disability would have on the business
- How likely it is that the key person will become disabled or die unexpectedly
Benefits of Having a Key Person Insurance Policy in Place
Having a key person insurance policy in place can provide your business with a number of benefits, including:
- Protection against financial losses if the key person passes away or becomes disabled
- Assurance that the company will have the means to recruit and onboard necessary replacement personnel
- Peace of mind knowing that the company’s operations can continue without major disruption
Steps to Take When Setting Up a Key Person Insurance Policy
When setting up your policy, there are several steps you should take to ensure it is properly established. These include:
- Evaluating which type of policy would be most beneficial for your business and its associated costs
- Determining who should be named as beneficiaries on the policy
- Identifying who the key people are in your organisation
- Calculating how much coverage is necessary to provide adequate protection
Common Mistakes Made While Purchasing Key Person Insurance Policies
When it comes to purchasing a key person insurance policy, there are some common mistakes that can be made. These include:
- Not having a clear understanding of who will be covered by the policy and what it covers.
- Failing to consider additional tax implications when setting up the policy
- Not taking into account the potential impact of inflation on the value of the policy over time
Tips on How to Maximise the Benefits of Key Person Insurance Policies
To maximise the benefits of your key person insurance policy, there are a few key tips to keep in mind. These include:
- Reviewing the policy on a regular basis to ensure it is up to date and adequate for your company’s current needs
- Having an open and honest dialogue with your insurance provider about any changes or developments that could affect the policy
- Making sure you have clearly identified all of the key people in your organisation so they can be accurately covered by the policy
- Ensuring that sufficient financial resources are available to replace any lost income due to death or disability
By following these steps and tips, you can ensure that you’re getting the most out of your key person insurance policy. Having this type of protection in place will give you peace of mind knowing that your business is protected in the event of an unexpected death or disability.