Key Person Insurance To Protect Your Profits

We'll review how to mitigate the financial loss when a key person dies through a key person insurance policy.  

Preparing for someone's death seems macabre. No one likes to think about the eventual demise that we all face.

As the adage goes, failing to plan is planning to fail. And in the arena of real estate, that saying is incredibly prescient. 

What Is Key Person Insurance? 

Key Person Insurance is something that can be provided for any person inside of your company who holds critical pieces for the company's continued operations. The company is the beneficiary and pays the premiums. 

In a small business, a key person is usually an owner, the founder, or perhaps a critical employee. The main qualifying point is whether the person's absence would cause significant financial harm to the company. If this is the case, key person insurance is worth considering.

How Does It Work?

Under a key person life insurance policy, the business owns the policy, pays the premiums, and is the beneficiary. If a key person dies, the company then collects a death benefit. You or your partners can use that money to help a business replace lost revenue as they search for a replacement.

This type of insurance can be crucial for a business that relies heavily on the health and well-being of a key individual. 

What Are The Benefits?

One of the significant benefits is that should the "key person" become disabled; your insurance coverage can step in and pay up to 100% of the death benefit if needed.

The money can be used as a financial cushion to buy time for the company, sometimes just a small family business, to find a new person to step in, to sell, to shut down, or implement other strategies that can save the company. 

Key person insurance gives your company options other than fire selling or bankruptcy, which happens when you lose the key person.

The coverage for key person insurance can be as low as $100,000 or up into the multi-millions of dollars.

Another aspect of this insurance would be employee retention. 

In the employee's contract, you can state that a percentage of the life insurance policy would go to the family should death or disability happen while employed by your company. These types of term policies can be very inexpensive and have a massive benefit to your company.

Both of these strategies can be instrumental to ensuring that you, your family, and your businesses grow and maintain the financial freedom we are working towards.

What Can Key Person Insurance Protect Against?

Key person insurance protects the company against risk and protects profits and partners. 

Protect profits

The insurance will counteract the lost income from sales or disrupted operations that the key person is involved with. 

The company may use the death benefit to cover the costs of recruiting, hiring, and training a replacement for the deceased. 

Or suppose the company cannot continue to operate. In that case, the insurance allows the business to pay debts, provide cash for investors, cover severance for former employees, and will enable the company to close down without chaos. 

Protect partners

The insurance enables the surviving partner(s) a cash infusion to buy out the key person's stake in the business. Combined with a buy-sell agreement, these two types of protections ensure an orderly continuation of the company. 

How Much Does Key Person Insurance Cost?

The cost depends on how much insurance a company needs. However, this insurance will cost less than bankruptcy if the worst happens to your key person. 

Some factors that you may need to consider when researching include the following: 

  • Size of business
  • Nature of business
  • Key person's role 

The cost also depends on whether you buy a term or a permanent life policy. Typically, term life is cheaper. 

Like any other insurance, the individual's age and overall health will determine the insurance cost.  

Key Takeaways

Key person insurance is a life insurance policy that protects a company in the event of the death of a key executive or other critical individuals. 

Insurance is necessary if an employee's death is detrimental to the company and disrupts the operation of the business. 

The key person for small businesses is typically the owner or founder. The company pays the insurance premiums, is the policy's beneficiary, and will receive the death benefit if the person dies. 

Investing in proper protection is critical to mitigating your company's risk. Otherwise, you'll be in trouble when a key person dies. That means you need reliable insurance specific to your needs as a real estate investor. 

If you want to learn more, check out our article about the challenges faced by real estate investors. It could be the difference between life and death–for your business.

Last Updated: 
November 30, 2022

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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