15 Aug The Importance of Key Person Insurance for Small Businesses: Safeguarding Your Most Valuable Assets
Is there someone working for your business who’s so valuable that the company would most likely close or face some tough financial consequences if you lost them? In the case of almost all small businesses, that answer would be “yes.” Thankfully, you have one way to safeguard this human asset, as well as ensure that the company won’t suffer financially should something happen to that person: key person insurance.
What is this insurance option? And how does it work? Keep reading to learn the answers to both of those questions and more right here.
Who is Eligible for Key Person Insurance?
Key person insurance is designed to cover the main stakeholders in a company, the ones who the business simply can’t do without. In a small business, this can be anyone from the founder and president, the CEO, crucial board members, or anyone else who plays a significant role in the company’s day-to-day operations.
An Example of the Importance of Key Man Insurance
For example, you started a small pizza restaurant that became popular over time and turned into a local chain with three other restaurants in nearby cities. The problem is that you’re the only one who knows the recipe for the pizza sauce that makes your food so great. If you were killed or critically injured in an accident, that recipe would end with you, and the restaurants would more than likely suffer, because the sauce would never taste the same again. This would undoubtedly cause the number of orders to drop. However, if your business held key person insurance on yourself, the restaurants might be able to rebound from the financial hit.
How Does Key Person Insurance Work?
This insurance policy is a little like life insurance, only instead of the money going to a relative or family beneficiary, it goes to the company instead. There are three different options when it comes to directing the proceeds of this insurance:
- Business Loan Guarantors – If the company has taken out business loans, then the funds from the insurance policy payout can go to the guarantors of those loans, preventing them from losing money should the company go under.
- Profit Protection – The money from a key person insurance policy can also go toward the business’ profits. This protects the company from bankruptcy immediately after the key person dies or is gravely injured and gives the business a chance to rebound financially from the loss.
- Partners and Shareholders – In some cases, the insurance money can go to the partners and shareholders, helping them buy out the portion of the company owned by the deceased owner, partner, or shareholder. This gives them full control of the business.
Do You Need Key Person Insurance?
If your small business has someone, or even several people, who it can’t operate without, then key person insurance can provide some protection. This way, if the unthinkable happens to them, the business will continue on. It’s like protecting their legacy, in a way.
Ready to learn more about key person insurance for your small business? Our knowledgeable team at Spivey Insurance can help review your current coverage or help you set up a new policy. Contact us today.