Key Person Life Insurance: Two Ways to Protect Your Business with One Policy
September is life insurance awareness month, which may indicate to you that it’s time to check out your current policy. But, this month is not just about individual life insurance – did you know that as a business owner you should also consider taking life insurance out on the key individuals in your organization?
Key person life insurance is a policy that a business can own. This type of life insurance can serve two purposes: protecting against the death of a key individual and helping to fund a buy/sell agreement.
Protecting Against the Death of a Key Individual
The first use case of key person life insurance is pretty straightforward. This policy insures a key individual in your organization in case of their unexpected death, because of the belief that if something happened to this person the business could suffer consequences.
For example, in a family-owned business, if a non-family member was hired to run the organization, it would make sense to insure this individual with to ensure the success of the business in the event of their death. The absence of this individual could cause clients to leave, vendor relationships to suffer, employees turnover to increase, and more. This type of life insurance policy allows a business to continue on in the face of that adversity.
Funding a Buy/Sell Agreement with a Key Person Life Insurance Policy
Key person life insurance is also useful to a business in the case of a buy/sell agreement.
Picture this: if you and I own a business as 50/50 partners, we would likely have an operating agreement (also known as a buy/sell agreement) in place. This agreement essentially acts like a will for the business.
If something happened to me, this agreement states that you would be contractually obligated to buy my shares from my family, and they are contractually obligated to sell the shares to you. This agreement ensures the business can continue to operate.
So where does key person life insurance come in? The life insurance funds this agreement so that both parties can carry out their obligation and create longevity for the business.
No one ever likes to think about what could happen to their business if a key individual unexpectedly dies. However, as your insurance advisor, risk management is part of our job. Key person life insurance can be a fitting solution to two issues you and your organization may face if the death of a key individual could negatively impact your business.
Reach out to Chris Henderson, Managing Director of M3 Financial, for more information on how your business could benefit from including key person life insurance as a factor in your risk management strategy.