One event that can seriously harm, and even put a company out of business, is the unexpected death of a key employee, salesperson, partner, or executive.
That is why many companies formulate contingency plans for such deaths, and even design thorough succession plans for owners and key executives, managers, or board members.
A term life insurance policy purchased on one or more of these key individuals helps to solve the difficult problem about how business will go on without this important individual.
How Business Life Insurance Works
The corporation, LLC or partnership should be the applicant, own and pay for the policy premiums, and name itself as the beneficiary.
The key individual must agree to the insurance policy be taken out on his or her life. This individual would need to, at the very least, help complete the application with answers about health history, and depending on the policy, may also need to take a medical exam.
Please note if you are purchasing life insurance on a key employee or individual, this is commonly referred to as “key man life insurance” or “key person life insurance”.
How Much Life Insurance Should a Business Apply For?
It’s difficult to measure the exact value an individual brings a business, but some questions you’ll want to consider in helping you quantify the value of your employee are:
1. Potential Lost Clients: In the case of the loss of a founder or great salesperson, consider the relationships that individual has fostered with your clients. You might even write down a list of key clients that may be doing business with you due to a great relationship they have with your key employee.
2. Cost of Replacing an Individual: Key employees or owners are not easily replaced. Finding and attracting a candidate with the necessary experience and qualifications may cost the companies thousands upon thousands of dollars.
Depending on what level of candidate you’re trying to hire, these costs may include job listings, hiring agency cost, wining and dining, as well as other accommodations. If a member of your own staff does the searching, you have that employee’s time as an expense as well.
I think I can come off this point… every business understands the high cost of replacing an employee, and dreads having to replace a KEY member of the team.
3. Intangible Losses: Your key man or woman may be an idea trailblazer. Some people’s ingenuity simply cannot be replaced. Be sure to insure this person accordingly.
What Can the Proceeds Be Used for?
Once your policy face value is approved and your business insurance is effective, if death occurs, the death benefit can be used for anything. The insurance carrier does not monitor this. On the front end, they do ask for details on why the business is apply for X dollars, but on the back end, they simply cut a check.
Which Type of Life Insurance is Most Suitable?
In 90% of these cases, a term policy should do the trick. Some term policies offer coverage for up to a 30 year period, with the ability to renew or convert the coverage to a permanent policy at the end of the initial 30 year term.
You will also have the occasional case where a business says, “Hey, we don’t care if this person lives to 50, 80, or 100… we will ALWAYS need coverage on him.” In this case, term won’t suffice. It would be better to purchase a universal life insurance or whole life policy that guarantees protection for life.
Another use for permanent insurance would be for employee retention. Some companies may want to add an additional layer of benefits to the employee, and might use the life insurance policy as a makeshift deferred benefit plan, dedicating a certain percentage of the death benefit to the employee’s beneficiaries, rather than just the company. The company can even add a vesting schedule to the cash value, putting the cash in his hands as time goes by, therefore incentivizing the employee to stay with the company longer.
Click here for more information on types of life insurance that may be used for business purposes, and if you have any questions, please call us at 877-996-9383.