When small business owners or their key employees are unable to work due to disability or death, it can be hard for small businesses to survive. There are a number of life and disability insurance coverages to help protect against these risks including business overhead expense (BOE) coverage and key person coverage.
Are you a Small Business owner?
Over 99 percent of America’s 28.7 million firms are small businesses. The vast majority (88 percent) of employer firms have fewer than 20 employees.
Who needs key person insurance?
Key person insurance is a life insurance policy a company buys on the life of a top executive or another critical individual. Such insurance is needed if that person’s death would be devastating to the future of the company. For small businesses, the key person might be the owner or founder.
Who owns a key person policy?
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 business then collects a death benefit. That money can be used to help a business replace lost revenue as they search for a replacement.
Once you have determined you may need Key Person Coverage, ask yourself this question.
How is key person insurance determined?
The first rule of thumb is to buy eight to 10 times the key employee’s salary. The second and most preferable method is to look at the economic value of your key employee and ask yourself, “How much money would I lose if something happened to this person?” The answer determines how much key person insurance you need.
How does key person insurance work?
A key man insurance policy is usually owned by the company, on the life of an employee, with the proceeds being paid to the company in the event of the employee’s death or disability. While this is not the only structure available, it will result in the premiums being tax deductible and the proceeds being taxable.
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