The issue of key person insurance came up earlier this week in a meeting with two friends who were starting a business. Like many of my clients, they had been doing some pre-meeting research. They have put together a business plan. We’re finalizing the details of their operating agreement. One of their cousins is going to put together a fancy website. And now we were on to the insurance piece of the business.
What is Key Person Insurance
Key Person Insurance is a life insurance policy that a company purchases on a “key” person’s life. The company pays the insurance premiums and is the beneficiary of the policy. If the person dies, the company receives the insurance payout. The company can use the funds for a variety of purposes. It can pay expenses until a replacement person is found, pay employees, investors or debts. In extreme situations, the money can be used to wind down the company.
Does My Company Need Key Person Insurance?
There is no blanket answer for all companies. The first question to ask is which employees are irreplaceable. For most of the businesses I work with, that employee is the owner. Those owners do the hard work that keeps the business going. They handle the customers, they manage the business and they are often there at the end of the day to do the work no one else will do. For most companies, it’s a good idea to have key person insurance for these people.
How Much Insurance Do I Need?
It’s another question that is specific to each business. But I always recommend that my clients price out the different options and obtain as much insurance as they can afford.
Next Steps
If you or your business are considering key person insurance or need legal assistance with other issues facing your company, give me a call and we can sit down to discuss how to tailor an independent contractor agreement for you or your company – (877) AMAYERS.
