Most people are familiar with the kind of life insurance that works when, say, the breadwinner of the family comes to their untimely demise. However, life insurance for key people in a company, although playing a similar role, is less known.
Key person or key man insurance helps businesses afloat during the death of a key person like a CXO level manager. The main idea is for people holding vital roles in a company to get key man insurance if their death could lead to the demise of a significant portion of the company’s operations. It’s insurance that covers specific individuals who play a crucial role in a company’s survival in the event of death and disability.
The business takes and pays the insurance for its CXO level officials, so the company serves as the beneficiary. When a key employee dies or gets injured, the business can claim funds that it can use to make appropriate changes necessary for it to continue its operations. The claim from key man insurance covers the daily expenses of the company, payments to investors, or debts.
Individual talents have become critical to the success and growth of many businesses, so investors also see employees as an essential factor in the valuation of these companies. Every business has one or two valuable employees like a CXO level manager who contribute a lot to the growth and running of the company. Thus, it makes sense for a CXO level manager to get insured against untimely demise and other unfortunate events. There are many key man insurance providers available in the market today, so it’s best to compare them before deciding on which one to choose. You can use https://quotegrab.com for a comprehensive comparison of the best key person insurances before obtaining one.
Are you not convinced yet that a CXO level manager in your company needs to get covered by key man insurance? Read on to learn more about key man insurance and why it’s important to be insured as a CXO level manager.
How does a key person insurance work?
So, it’s the company that decides to purchase a life insurance policy on one or two of its key employees, pay the insurance premiums, and become the beneficiary of the plan. If the vital employee unexpectedly dies, it’s the company that receives the payoff from the insurance. The main reason why this coverage is essential for CXO level managers is that your death can also cause the company’s immediate death, especially if the business is still in its infancy stages. The key person insurance will help the business to survive the massive blow of losing the individual who contributes so much in making its operations work.
The company will make use of the insurance proceeds to cover its daily expenses until they find a person to replace its former CXO level manager. The money from the insurance can also pay off debts, go to the company’s investors, pay severance to employees, and fund the closing down of the business in an orderly manner. In tragic situations, the insurance payoff can be a last resort for companies to find some options or solutions before immediate bankruptcy becomes inevitable.
Different categories of loss that key person insurance covers
There are different categories covered by key person insurance. These include losses that a company experiences due to an extended period of absence of a key person if the person can’t work, but hasn’t died. The insurance also covers lost income from the delay or cancellation of business projects that the key person handles. Also, it includes partnership and shareholder interests, protecting them and enabling partners and other existing shareholders to purchase these assets. Last but not least, key person insurance covers banking facilities and business loan guaranteeing. The value of the insurance payoff will equal the guaranteed amount.
Two major types of key man insurance policy
So, there are two primary choices for a key-person insurance policy, and each of them works in different instances. If you’re planning to get insured as a CXO level manager, it helps to take a look at these types of policies to make the right decision moving forward.
Key man life insurance
The business owner or the CXO level manager can purchase key person insurance to protect the business against their death. The company becomes the policy owner and the beneficiary of the insurance claims. The business owner or the CXO level manager is the insured key person. Keep in mind that in this type of insurance, the insured individual doesn’t receive anything from the policy. Every proceed goes to the company.
This type of insurance policy can come in the form of a permanent policy or a term policy. Of course, the term policy is the cheaper option between the two. It only applies for a specific period, which can be as short as a year or as long as twenty years. The coverage of the insurance ends during the expiration of the term, or when the insured individual dies, whichever between the two happens first. The business will collect the death benefit once the insured dies. The company can then use the money to fund the hiring and training of a replacement, pay off debts, or for any other purpose valid as per the policy of the insurance.
It’s essential to note that while the key man insurance benefits all go to the business during your untimely demise, the company can decide to transfer the permanent policy to you. Only if you can successfully retire from the company and if they don’t need your services anymore. Basically, the insurance serves two purposes – It can become collateral when taking a loan out or it can pay a death benefit for the key employee.
Some insurance policies also have a “first to die” provision, which becomes useful if the business has more than one CXO level manager or executive officers. The company can save money by purchasing a single policy that pays a debt benefit if any one of the identified officers dies. The insurance policy will then cover the rest of the officers still with the company.
Key man disability insurance
Another type of policy is the key man disability insurance. It protects the company or business against the risk associated with a business owner or CXO level manager being unable to perform their job due to becoming disabled. The insurance benefits may be payable as a lump sum or every month. There’s a waiting period for this type of policy, and the business has to wait it out before receiving the benefits. The waiting period can last for thirty to sixty days for monthly payments and twelve to eighteen months for the lump sum payment.
So, which key man disability policy should you choose as a CXO level manager to protect your company or business? Like private health insurance, it depends on your needs, or, in this case, the company’s needs since there’s no “standard” for this type of insurance policy. That said, you have to weigh your options carefully and determine the needs of your business.
The main reasons why it’s important for a CXO level manager to get insured
Finally, the most awaited part of this post. Why it’s important to be insured as a CXO level manager? Without making the wait any longer, read on below for the main reasons why having key person insurance is essential for your business.
It’s difficult for the business to continue after your untimely demise
Have you ever considered how much knowledge you have and how it contributes to the day-to-day running of your company? Your death or disability would inevitably affect the performance of the business, especially if your company is in the services industry. Do you think it will be easy for the company to replace you and recover from the revenue impact when you’re gone? If not, then consider getting insured so your company can quickly get back on track after your untimely demise.
It should be a part of the business continuation plan
A business continuation plan is essential for every business to prepare for unexpected events. Once you’re gone, who will replace you to take over the operations of the business? Is there someone within the ranks of the company who’d be willing and has the necessary knowledge to resume your role? If there’s someone you can trust to replace you, then everything will be fine.
The problem, however, is that most companies rely too much on a single person that when this individual dies, they’d rather get closed or sold than doing anything with the business to move forward. When an unexpected tragedy occurs, the key person insurance could take care of your colleagues, other employees, or partner buy/sell issues. It assures them that they’d have the necessary funds to find a solution and start from there to continue the operations of the company.
Imagine what will happen when you, as a CXO level manager of your company’s business operations, hold the formula for a proprietary product. As a business, you’ve decided to keep the product’s formula a secret while waiting for your product to receive a patent-pending status. You know how competitive the market has become, and you understand that when another person gets a hold of your formula, it would mean losing the prospects that your company has been eyeing to capture for years. And so, the company has decided that only a very few people should get involved. It looks like an excellent and wise idea at the time or not?
If something happens to you or another key person in the company who’s holding the secrets of the formula, chances are the method won’t receive a pending status from the authorities, and that could be a massive blow to the whole company. How would you manage to deal with this kind of situation?
It doesn’t matter if you have a laboratory full of scientists and experts capable of working on some tweaks for the formula and continue your efforts on getting the patent, do they know where to start? How could they start tweaking without you to help them out and give the necessary details to make everything work?
To make things worse, your company has decided to take out a loan to finance the work of unlocking your winning recipe. They want to continue the mission to get the pending status for the company’s patent product and dominate the industry. The problem is that they have borrowed heavily, and the creditors have started to knock on your company’s doors. They haven’t unlocked the secret formula yet, and they have used up all the funds from the company’s vault and from the loan they have taken out. The only option left is to file for bankruptcy, and, yes, it’s the last thing you’d want to see to happen to your beloved company.
What the key man insurance does is provide your business enough funds to pay off the debt. The most important thing now is for your company to be debt-free; it doesn’t matter whether your patent made it or not. Business debt will continue to rise each year, which makes debt resolution a primary reason why getting insured as a CXO level manager is essential.
Financing needs for future growth
One out-of-the-box reason why key person insurance should be in place in your company is that many credit companies, financing institutions, and banks require it before extending loan terms to your business. Key person insurance reduces the risk for any lending institution by ensuring the longevity and stability of your company.
Amount of key man insurance you need
So, how much key person life or disability insurance do you need to purchase as a CXO level manager? The answer to this question depends on the estimated economic loss your company will suffer when you die or get disabled. You also have to consider the cost associated with recruiting, hiring, and training someone to replace you and assume your role in the business. Don’t hesitate to ask the insurance agent to do the calculations for you, so you know the amount you need.
Cost of policy coverage
So, how much will it cost you to get insured? It depends on many factors, which include your sex, health status, age, as well as the nature and size of your business. Some other factors include the policy you choose, whether it’s the term policy or permanent one.
The key person life insurance is pretty simple, and its concept makes sense for every type of business, regardless of the size of the company. The problem is that only very few businesses utilize it enough. A lot of things in your company could go wrong when you, as a CXO level manager, die or become unable to perform your duties. Key person insurance comes to the rescue and protects your company against bankruptcy or business closure.