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Key Person Insurance: The Benefits for Small Business Owners

It’s not a topic many people want to discuss, but preparing for an unexpected death is crucial to ensure your assets are protected, especially as a small business owner. Most people know about personal life insurance and its benefits to the insured’s family, but have you heard about key person insurance for your business?

This type of insurance policy is essentially life insurance on the key person in an organization, if you’re the business owner, that’s likely you. As the beneficiary of the policy, the company purchases the insurance and pays the premiums. If the insured passes away unexpectedly, the company receives the insurance payoff.

Who needs key person insurance?

If your business relies heavily on one person for the continued success of the company, then that person is a good candidate for insurance. For example, if the business owner is solely responsible for bringing in sales leads, then operations will suffer severely, should the worst occur. Similarly, if there’s a key individual with special skills that would be difficult to replace, such as the lead developer of a small tech company, they might be insured.

Another reason you might want to look into key person insurance has to do with any business loans you’ve taken out or might want to take advantage of in the future. Some banks or investment firms may require an insurance policy before they move forward on a loan. Even if your financing partner doesn’t have insurance policy requirements, a key person insurance policy can fulfill the business’s obligations on any remaining loan payments. Visit the Build Fund website to learn more about the benefits of debt financing for your small business.

Key person insurance gives the business options

In the event of an untimely death, a business without key person insurance could be faced with bankruptcy. However, the payout of insurance can alleviate that situation and allow the company the time and resources to make the proper arrangements. The insurance could be used to offset day-to-day operating expenses or supplement lost revenue until it can find a replacement person.

Alternatively, if the company does decide to shut its doors, the insurance proceeds can help close the business smoothly and calmly. The business can afford to pay severance to employees instead of leaving them high and dry. Investors will also receive their portion of the disbursement.

Do you want permanent or term?

Just like personal life insurance, key person insurance is usually offered in either permanent or term policies with similar types of pros and cons.

A term policy is set for a specific period of time, ranging anywhere from one to 20 years. If the person insured is still alive and well when the term expires, then nothing happens. The greatest benefit for term insurance is the lower monthly premiums.

With a permanent policy, the premiums will be higher, however, it can be used as collateral for a loan. Additionally, a permanent policy can be transferred to the insured if the business no longer needs the coverage.

Though key person insurance covers a person, don’t confuse it with a personal life insurance policy. If you have loved ones that depend on your income or would need funds to cover expenses, you should look into a personal policy.

After the tragedy of death, key person insurance for a small business could mean the difference between the success or failure of the organization.

If you’d like to start or expand your Indianapolis-area business, the Build Fund, operated by Renew Indianapolis, may be able to connect you to flexible, affordable, and responsible funding options for your business. Start the process now!

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