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What is Key Person Insurance?

Key person insurance is a type of life insurance taken out by the business to compensate financial losses that would emerge from the death of an important person in the business. This key person is usually the owner, the founders, or possibly a key employee or two. Without these crucial people in your business, it could go under quickly. This is especially important for small companies because the unexpected death of the owner can cause the business to go under immediately.  The purpose of key person insurance is to keep the company afloat while they search for another person to fill the lost position. It can also help assure progression of the business for employees, owners, and shareholders. Taking out a key person insurance policy on a key person can also strengthen the relationship between business partners. The payout can be used to find a replacement, pay off debt, distribute money to investors, pay severance to employees, and possibly shut the business down in a professional manner.  The company is the beneficiary of the life insurance policy and pays the premiums.

Who Needs Key Person Insurance?

To determine whether you need key person insurance for your business, you have to think about who is irreplaceable in the short term. This is, in many cases, the owner of the business. Anyone who keeps the books, manages the current clients, or is in charge of the employees should be considered a key person in a small company. Small businesses are the most vulnerable in the loss of a key person because without the owner of the business there is no one to get new clients, take care of the current ones, or manage the books.

How Much Do You Need?

In order to know how much key person insurance you need, think about how much it would cost to keep the business going until you are able to find a replacement. It usually takes some time for a new person to get the business back up to its normal speed. In general, you should get as much key person insurance that you can afford. Then think about how long that key person is going to be working with the company. Based on that logic, you should get a term life insurance policy for the amount of time needed.
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