If you own a small business, you usually have that person.
They are the ones that you and your business can’t live without. They keep things afloat and they give you the honest truth. They invest the money needed to keep the business open and are your partner in every sense of the word.
In terms of life insurance for businesses, they are what’s known as a “key person.” A key person is someone who is so valuable and contributes so much to your business that they would be difficult to replace. In such cases, life insurance can come in very handy.
Key Person Life Insurance Basics
With key person life insurance, a business takes out a policy on its most important employee or a number of employees. Such a form of insurance protects your company if a key person or person dies or even becomes disabled.
A key person often serves in a role within your business that you would consider highly specialized or indispensable; they have unique skills that are nearly impossible to duplicate. Maybe they are your top seller, your most trusted created mind, or someone with whom you share the majority of small business responsibilities.
If you lose a key employee, that loss can be difficult to recover from and highly expensive.
The disruption caused by the loss of a key person includes significant drops in sales or a vision guiding the business to disappear. Orders may fall through, clients may become disappointed and go elsewhere.
Other people who invested in your small business may become wary of continuing a business relationship with you. Sometimes, losing a key business person means a company shuts down entirely.
While key person life insurance can cover business partners or employees, it can also work to protect the future of the business. Many small business owners often use key person life insurance to also protect members of the family set to inherit the small business.
Choosing Key Person Life Insurance
Key person life insurance can be integrated into the two main types of life insurance offered for small business owners. A term life insurance policy typically provides coverage for either 10 or 20 years.
Permanent life insurance provides protection for a lifetime for either yourself or the individual on the policy, including a key person.
For key person disability insurance, coverage is offered until the insured person ends employment reaches or certain age or the benefit period runs out. In this type of insurance, a total disability occurs when a key person is under the care of a doctor because of sickness or an injury and is unable to perform their vital work duties.
The qualifications for key person disability insurance vary, but they can accommodate many situations within small businesses.
Typically, a key person must be up to 55 years old to be insured and the policy is active until a person turns a certain age or departs a company. Benefits for key person disability insurance can be high, for example, up to $15,000 a month for a year, and they often start after two to three months of total disability.
Another Big Benefit of Key Person Life Insurance
If a key person designated in your life insurance policy dies in Canada, your business can get a death benefit that is tax-free. This tax-free benefit can do everything from appeasing creditors’ fears and covering new expenses to repaying accumulated debts.
Since losing a key person can often lead to significant drops In business, a death benefit from a business life insurance policy can act as a cash reserve for any type of anticipated drop in revenue. It can also be used to cover the costs of the skills lost when you lose a key person.
How about when your business recovers? Key person life insurance benefits can also be paid out to owners as tax-free dividends. Additionally, funds from the policy can be given to the spouse of the deceased in the form of a $10,000 death benefit that’s also tax-free.
The Split Dollar Coverage Option
Your budget is a major factor in the life insurance options you chose as a small business owner. Permanent life insurance policies are attractive to some higher-level business owners, but small businesses who want key person life insurance may want to avoid a cash value policy.
With split dollar life insurance, a business and an executive, such as a small business owner or another key person, buy a life insurance policy on someone jointly.
In split dollar life insurance, the business owns and receives benefits from the death coverage and the person listed on the policy is the owner and beneficiary of the policy’s cash value.
The business pays the coverage cost and the insured makes plan contributions.
A Solution For Your Small Business
In many respects, key person life insurance may be a necessity for your small business. It protects not just your business interests but your intellectual property, the knowledge, advanced skills, reputation, and business relationships that are specific to you alone or unique to a key employee other than yourself.
It’s a solid investment that often requires smart and unflappable guidance from an expert. When you’re ready to develop your specific plan for key person life insurance, reach out to life insurance agent and investments advisor Sim Gakhar.
With longtime experience helping small business owners across Ontario, Canada, secure their financial present and future, Gakhar can be a vital partner in creating a life insurance plan that meets your current and future goals and addresses everything from key persons and heirs to taking advantage of tax-free benefits.
Gakhar knows that every business plan is unique and understands the complexity of being a small business owner. She works closely with all of her clients to outline their needs and their detailed goals, finding a comprehensive life insurance plan that assures financial stability.
To start the process of developing a business-oriented life insurance plan today, simply give Gakhar a call at 647-8890-7290 or reach out via email at [email protected].
Essential Planning for Financial Security
Helping business owners and self employed professionals grow retained earnings tax-free, pass more wealth to the next generation, and protect their biggest asset – themselves, the key person of the business.