Buy/Sell Agreements, Key Person Life Insurance
What’s Included in Key Person Life Insurance?
Key person life insurance policies are designed to protect the future interests of a company by funding a buy/sell agreement. This will allow the surviving owner to purchase the deceased partner’s financial interest from the estate. Companies do this as a way to prevent taking on unwanted or unnecessary partners, and also as a means to help with the expenses related to the loss of a vital employee or someone critical to ongoing operations.
This insurance specifically provides coverage for a company owner, partner, or significant employee. In the instance that the sudden loss of this individual could negatively affect the business, KP life insurance can pick up the slack. It makes sense if the company’s financial viability or professional reputation is linked to the owner or employee’s name or reputation, which could result in business closure after their death.
If the death of an individual could in any way threaten the financial security or viability of the company, this insurance can provide protection. Additionally, this policy is going to offer partnerships protection in the event of an unexpected death, allowing both parties peace of mind.
The exact amount of coverage that is needed will depend on the financial impact that the loss will have on the company. Try to calculate what that time period would cost—both in terms of lost sales, as well as the added expense of training and hiring someone to replace the key individual. Then, buy the coverage you need based on that amount.
How Premiums are Determined
Premiums for key person life insurance will be determined based on the level of risk that they present to the insurer, as well as the amount of coverage that is desired. Some companies or industries may be at higher risk than others, creating higher premiums or the need for additional riders to the policy.
For example, if one partner is young, in good health, and lives a low-risk lifestyle, the premium may be relatively inexpensive. However, if the other partner is older, in poor health, or lives a more high-risk lifestyle, their policy could be exponentially more expensive.
Other Factors Include
The size of your business and its overall value also affect what you will pay for key person life insurance. Be sure to consider all of these aspects so that you get enough coverage.
In the event of a straight partnership, where each partner’s share is worth a specific amount, you could simply purchase that amount of coverage to provide the option to buyout in the event of an unexpected death.
Policy Review Tips
Review these elements when choosing your KPL insurance policy:
- What is the deductible, if there is one?
- Is the coverage sufficient for any and all financial losses?
- What events or circumstances are covered?
- Are there any specific exclusions to coverage on the policy?
- Does the insurer have a good track record with paying claims in a timely fashion?
- Are there any special endorsements or riders required?