Key man or person life insurance is to take care of future matters when someone vital to the company dies before there are necessary plans to cover for the employee. This individual is usually someone in a key position within a department or on a team. His or her knowledge and expertise is essential to the ongoing production or planning for the company in some manner. Within smaller businesses, the key person is the owner in normal circumstances. He or she would have a crucial role as the owner. Without him or her, the company would sink without some preparations and assistance such as key person life
insurance policies.
The Workings of Key Person Life Insurance
Someone purchases the policy, pays the premiums and is the beneficiary of the coverage. If the person dies unexpectedly or before other preparations are in place, the company will receive the monetary insurance payoff provided by the carrier. While the death could spell the end of the company, the insurance settlement may provide the funds for the continuation of the business in the absence of the key person or owner. The proceeds are available as a temporary measure to replace the key person so that the entity may continue into the future. This may also require a lawyer to pass on the company in the absence of the original owner.
Options Beyond Bankruptcy
When the company faces possible bankruptcy for the death of the owner, the managers may use the proceeds of the key person life insurance policy until the financial matter clears up or a change in procedures is a possibility. If the company changes hands from the death of the owner, the insurance coverage settlement could give the business another option than bankruptcy based on how large the policy is and how long it takes to acquire the funding. While the owner or key person may have a personal life insurance policy for family, the key life insurance provides for the company only.
Exchange of Ownership
If the key person that dies is the owner, he or she may have put in place a business succession plan. This could transfer the ownership to a specific person. However, if the company passes to a spouse, a manager may have the ability to purchase the business from this person with the proceeds of the key person life insurance settlement. This could take years to occur, and much of the proceeds may pay to keep the company running or to progress production until revenue kicks in from sales. The owner may have a will to pass on the company to a person or for an acquisition or merger with another business.
Amount of Coverage
The policy coverage and amount provided to the company may depend on how large the business is and how much it may require to function without the key person. Possible amounts are in certain increments based on these factors which may amount to $100,000 up to $1 million. Comparative costs for the person taking the policy out may limit what he or she can afford. Buying the necessary policy that fits his or her budget is usually how much the company will receive at the time of the key person’s death. The beneficiary may need to consider how much the business needs for a certain amount of time to operate.
The key person may need to think about the operations costs, how many employees work for the business and what the entity needs to produce products or services. If additional factors exist in warehouses or distribution centers, the amount of coverage may increase. Without key person insurance, the company may struggle to remain open. Many companies collapse in the interim while attempting to change ownership or to put another key person in the previous individual’s place.
Key Person Insurance Legal Help
Some companies require the services of a lawyer to determine a succession plan or a policy to ensure the future of the business if the key person dies. The owner may need to work with the lawyer to determine how much key person insurance coverage to purchase as well.
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