An individual with skills and knowledge contributing significantly to a business income is known as a key employee. As such, key employee coverage is essential for any business. Companies can most likely have substantial negative financial consequences for their business when they lose a key employee. As the National Association of Insurance Commissioners outs it in a survey, more than 70 percent of companies that participated in the study confirmed their dependence on one or two key individuals for their success. However, 22 percent have life insurance in place.
What is Key Employee Coverage?
When a certain key employee becomes disabled or dies, disability income or life insurance can compensate a business. With these coverage options, companies can resolve some of the adverse financial effects they get from losing a key employee’s contribution.
How Much Life Insurance is Advisable?
When it comes to putting a dollar value on the economic effect of a key employee’s death, no one will get any set formula. However, there is a need to guide how much insurance coverage to buy by coming up with a figure. Companies can get formulas for this from some life insurance that can or cannot have any real connection with the employee’s worth to the business.
They can facilitate valuation by looking at the employee’s responsibilities in some situations. For example, when an employee is responsible for a particular number of sales, the loss can be the profit from that individual’s sales, apart from the profit the company could expect from a replacement.
The company must also include the expected cost of replacing such individuals, such as moving expenses and employment agency fees, and potentially a higher salary for the replacement.
Who Is the Owner of the Life Insurance Policy?
Typically, the company owns the policy as it is the beneficiary that pays the premium. On the other hand, the key employee and the company can split the death benefit value, cash surrender, and premium payments. The purchase of this insurance must have the employee’s agreement. A resolution may also need to be in place from the board of directors indicating the policy purpose by the insurer.
The Kind of Life Insurance to Buy
When the sole purpose is to compensate for problems caused by the key employee’s death, businesses typically use the term insurance. In some circumstances, policies that accumulate cash value tend to be appropriate. People will need to consult their life insurance agent to discuss which policy is better for their business.
Definition of Key Employee Disability Income Insurance
Many people do not know much about key employee income insurance, unlike key employee life insurance. However, there is a much greater risk of a key employee experiencing permanent, total, or partial disability than the death risk. The loss of the business can be the same as when the individual has died should a key employee suffer a permanent total disability. With the key employee disability income insurance, companies can get protection from this loss exposure when they pay anywhere from 40 to 70 percent of the disabled employee’s earned income.