When a company is the beneficiary of a life insurance policy
payout on a particular person's life, the person who died would have been
considered as a key person with regards to the running of the company. The life insurance policy the company held on his or her life would have been considered
as being key person insurance. This type of insurance has been introduced in
more recent times as a way of compensating a company for the loss of key
personnel so that the company doesn't suffer too much financially while the
lost person is being replaced. It is more commonly used to cover the loss
should the owner, partner or highly valued employee die in circumstances where
the company was not prepared.
Larger companies would be likely to take out a life insurance
cover over such people as a top executive, a principal shareholder, a top
salesman or an employee who was of such importance that his or her loss could
put the company at a financial disadvantage. Smaller businesses are more likely
to take out the same type of cover to protect the business against any
financial loss following the death of people who are crucial to the day to day
operation of the company.
The type of person considered to be a key person to the successful
running of a particular business depends a lot on the kind of business
involved. In the case of many small businesses, it would most likely have been
founded by one or two persons, usually the partners or owner. These people
would have put a lot of time and effort into making sure the business
succeeded. They would carry with them much information on the running of the
business that would be hard to transfer to another person without them having
some experience. If the owner, or one of the partners, were to suddenly die,
taking this experience with them, it would take time to have them replaced.
During this time the business would be at a financial disadvantage, and the
loss would have to be recuperated in some way. Protecting a company from this
loss can be achieved through key person life insurance.
Compensation for Loss of
Expected Income
Good sales people are very hard to find and if a company was to
lose the services of a key salesperson through an unexpected death, it could
set the company back financially and leave it vulnerable to a competing company
taking advantage of the situation. If key person insurance had been taken out
on the life of the valuable salesperson, the company would be compensated for
any loss of expected income while a new employee was settling in and going
about selling new contracts.
There are many companies that rely on key personnel especially in
the area of new technology. This is an area of constant change and it is not
unusual to find an employee actually has more knowledge in this area of
business that does the owners do themselves. If that salesperson was to
suddenly die the business could well be at a financial disadvantage in not
being able to continue until a suitable replacement was found.
In both these cases key person life insurance would be a very
important tool for the businesses involved to invest in. Key person life
insurance proceeds could be useful to a small business for the following
reasons:
- If the business has to close down because the key person could not be replaced, the insurance money could be used to close the business down in a proper manner by paying severance pay to the employees, to pay out all outstanding debts and distribute money owed to investors.
- Pay all ongoing expenses until a suitable replacement is found.
- Allow surviving partners to buy shares in the company from the family of the partner who has died.
- In extreme cases the proceeds could be used to avoid bankruptcy of the business.
Lenders Sometimes Require
Key Person Insurance
Many lenders who loan money to a business will require that the
business take out key person life insurance on certain people involved with the
company who they consider vital to the ongoing profitability of the business.
When this is required as part of the loan conditions the company will be
required to pay the premiums but the lender will be the beneficiary. This is
made a requirement so that if the key person dies the lender will be assured of
getting their money back. It is not unusual in these circumstances for the company
itself to take out the cover on the person or persons beyond that required by
the lender so that if the key persons were to die the company would receive
compensation over and above that required by the lender.
If you are a sole trader and you have no employees there is no
reason to consider key person life insurance. In these circumstances all you
need to worry about is making sure you have sufficient personal life insurance
so that should you die you don't leave a financial burden on those you leave
behind.
This article was written by John from lifeinsurancefinder.com.au.
Visit Life Insurance Finder to learn more about key person policy.
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