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Key employee term life insurance

Protect what may be your company's most valuable asset

People usually think of individuals buying term life insurance for personal use...that is to protect their families.  There are actually many business uses of term life and protecting against the lost of a key employee is one of the most common and perhaps most important.  Let's understand how a key employee life policy can protect your company's most valuable assets.

The bulk of companies in the U.S. are small business with 1-5 employees.  The IBM's and Coca Cola's of the world occupy our thoughts of what a company is but that's not the real story.  Most companies are small...even family businesses.  This runs the gamut from architects, real estate agents, to piano teachers.  If you think about it, most small companies revolve around 1 or 2 individuals whose expertise, work ethic, or talent is the foundation for the entire company.  This can be a mechanic's years of knowledge, an attorney's ability in the courtroom, or an artist's creative vision.  Quite often, it's the shear ability to get work done well.  Don't underestimate drive and ambition to move a company.  This same concentration of ability and focus that drives success is also a potential liability for the entire company.  If that person passes away, then what?  In most cases where the company does not have key employee life insurance, the company will find itself in a great deal of trouble.  How many stories have we heard of spouses, partners, children running successful businesses into the ground?  Is there a way to protect against this?

Yes and fortunately, it's affordable term life for a key person.  Essentially, the company takes out a term life policy on an employee who's lost would be catastrophic (or just really really bad) for a company to function as a going concern.  The company would be the life insurance beneficiary in this case.  How exactly would this play out?  Let's look at the example of a star programmer who's ongoing work is the core framework upon which a small software company's business is built.  This employee has given some percentage of ownership in the company (let's say 10%) and the is paid well for his/her services.  It's a small 5 person company.  This key employee passes away.  Luckily, the company had a key person life insurance plan taken out on him which was issued at the time of employment and on which, employment was contingent upon.  The company can now take the proceeds of the life insurance plan and use it to find and hire a qualified replacement.  Maybe even more importantly, the benefit will allow the company to navigate the down time or interim till someone of equal ability can be brought on board.  It make take a year to successfully find a replacement which means lost income and revenue.  The term life benefit can help to mediate this period of time.

In this respect, you can think of key person life insurance almost as a replacement of income derived from one person's ability to the company (instead of the family).  In our other articles, we talk about term life used to replace income to family resulting from the loss of an earner.  In this case, the amount of benefit can be calculated based on what is required to 1) keep the company afloat during the loss and; 2) successfully find and secure replacement.  Due to this, the term life length might be less important (other than for true family businesses) than the amount.  20 years of term life coverage probably doesn't make sense at $50K.  10 years of term at $500K might be a better fit for key person if you need to stay within a certain budget.  A lot can change in the life of a company and people move around quite a bit.  You would hope that the company has provided for other options and resources after a certain period of time.  

This calculation is ultimately dependent on many criteria that differ from company to company.  We would be happy to help you run a term life insurance quote with different mixes of term length and amounts of coverage to find the right balance for your key employee term life insurance.



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