Insurance is a form of risk management where there is transfer of risk f a loss from one entity to another in exchange for compensation. The entity to which the risk of loss is transferred to is called an insurance company. This is an important aspect of any business due to various uncertainties in the business world.
Among the very important insurance cover that a business should acquire is the key person insurance. The key person insurance is a form of life insurance for a key employee or partner whom the business depend son for its continued successful operations. Therefore the business is the beneficiary under this type of insurance policy. That is to man that the business is the one that is transferring its risks of the insurance provider.
For a small business, the key business is usually the owner of the business or sometimes the key employee. Actually these are the most important people in a business since their absence would cause serious repercussions on the business directly. That is the reason why you definitely have to consider having a key person insurance policy on them.
How does a key person or keyman insurance policy work?
The company or business purchases a life insurance policy on its key employee (s).the company is the one that pays the premiums and is also the beneficiary of the life insurance. Then if the key person that the business had insured dies then the company gets the insurance payoff. The reason behind this is that the business is taken as a sole entity whose life and that of the key person are interconnected. The death of the key person could or may cause the death of the business especially if it is a small business.
The keyman insurance policies are set to helps business to survive the loss of their key employee, owner or proprietor. Therefore with this kind of an insurance the business is safe even in the circumstance of the person the business depends on becomes absent.
The insurance payoff that the business receives can be used for expenses until it finds a suitable replacement of the key person. This is because they may have to outsource for the services that the key person was offering to the business. Also the company may opt to pay off debts, distribute the money to the investors and pay surveillance to its employees and then close the business down. Therefore in short this type of an insurance gives a business or a company some options upon the death of its key person other than being declared bankrupt.
Who needs the key insurance in a company or a business?
When choosing the key person in a business you have to look at the people involved and find out who isn’t replaceable in the near future. For the small businesses and companies this person is usually the owner or founder.
However for large companies it may be considered as an employee whose value the company can’t stand loosing.
It isn’t necessarily that a business or company should only have one key person. It may have a number of them depending on whether the business is ready to pay the premiums for all of them.