Small business owners know how important their employees are to their success. Sometimes the contributions of a select few are especially significant. These are the people who are critical to the business and whose death or disability could threaten the business’ survival. Key person coverage commonly consists of life and/or disability insurance that the business owns on its key employees to protect the business.
The benefit paid from a life insurance or disability insurance policy is generally tax free and can help the business recruit and train a replacement, pay off debts, or transition the business in an orderly manner if desired. In a tragic situation, key person coverage can provide the company with financial options to make the appropriate adjustments.
An important first step when it comes to key person coverage is deciding who should be covered. These are employees that have unique skills or that have relationships that would be costly and/or difficult to replace. This list could include technical experts, sales leaders, or other industry specialists. Don’t forget to consider how the death of an employee owner would impact the viability of the business; owner employees are often also key employees.
The underwriting process for Key Employee coverage is very similar to the underwriting process of a Term or Whole life Insurance policy. The insured person height, weight, medical history, and whether a smoker or not will determine the health class (Standard, Preferred, or Preferred Plus). In addition, the company/Employer have to provide a proof of the employee's title and job description with in the company.
In Key Person coverages, the policy is owned by the company and the death benefit is paid to the company.