Key Person Insurance: What Is It and How Does It Work?

Key Person Insurance: What Is It and How Does It Work?

Key person insurance is a simple, efficient way to provide your business with the liquidity needed to handle the loss of a key employee and recruit and train a replacement. The plan may also help to replace lost profits as a result of the loss.

How to Determine Who Is a Key Person

A key person is a critical component of the success and profitability of your business. Key employees can be business owners, successful sales reps, or individuals whose daily contributions are vital to the success of the business.

How Does It Work?

The business buys a life insurance policy on the life of the key employee. The business is the owner and the beneficiary, and pays the premium insuring the key employee. Upon the death of the key employee, the business will receive the entire death benefit. The key employee does not have any interest in the policy, nor does his family receive any benefit from it when the premature death occurs.

Advantages of Key Person Insurance

  • Provides cost-efficient liquidity immediately upon the death of a key person.
  • Provides cost-efficient liquidity to help the business function after losing a key employee.
  • Keeps the business running smoothly.
  • Provides the company with a valuable asset on the company’s balance sheet.

How to Determine the Right Amount of Insurance Coverage

A typical rule of thumb for deciding the amount of life insurance coverage is five to ten times the annual compensation. In addition, you should take into account how much it will cost to replace the key person, how much the person is worth to the bottom line, and how much of the company’s loss you are willing to ensure.

We’re Here to Help

Key person life insurance is an important way for a business to protect itself against the loss of key employees, partners, or owners. Key person life insurance is simple to set up and easy to implement, and should be considered by a business whose day-to-day and long-term performance may be in jeopardy if something happens to one of its vital employees. CBIZ Life Insurance Solutions understands that protecting your employees and your business is critical. Connect with a member of our team to learn more about our key person insurance.

Key Person Insurance: What Is It and How Does It Work? person insurance allows a business to effectively handle the loss of a top employee. Here’s how it works. 2022-03-04T18:00:00-05:00A key person insurance plan covers the life of an employee who is deemed as a valuable asset to the company. NoneYes