Key Person Insurance: What Is It and How Does It Work?

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CBIZ Manufacturing
& Distribution
KeyPersonInsurance:What
IsItandHowDoesItWork?
A
key person insurance plan covers the life of an
employee who is deemed as a valuable asset
to the company. It is a simple, efficient way to
provide your business with the liquidity needed to
handle the loss of a key employee and recruit and train
a replacement. The plan may also help to replace lost
profits as a result of the loss.
How to Determine Who Is a Key Person
A key person is a critical component of the success and
profitability of your business. Key employees can be
business owners, successful sales reps, or individuals
whose daily contributions are vital to the success of the
business.
How Does It Work?
The business buys a life insurance policy on the life of
the key employee. The business is the owner and the
beneficiary, and pays the premium insuring the key
employee. Upon the death of the key employee, the
business will receive the entire death benefit. The key
employee does not have any interest in the policy, nor
does his family receive any benefit from it when the
premature death occurs.
Advantages of Key Person Insurance
■ Provides cost-efficient liquidity immediately upon
the death of a key person.
■ Provides cost-efficient liquidity to help the
business function after losing a key employee.
■ Keeps the business running smoothly.
■ Provides the company with a valuable asset on
the company’s balance sheet.
How to Determine the Right Amount of Insurance
Coverage
A typical rule of thumb for deciding the amount of life
insurance coverage is five to ten times the annual
compensation. In addition, you should take into account
how much it will cost to replace the key person, how
much the person is worth to the bottom line, and how
much of the company’s loss you are willing to ensure.
We’re Here to Help
Key person life insurance is an important way for
a business to protect itself against the loss of key
employees, partners, or owners. Key person life
insurance is simple to set up and easy to implement,
and should be considered by a business whose day-to-
day and long-term performance may be in jeopardy if
something happens to one of its vital employees.
CBIZ Life Insurance Solutions understands that
protecting your employees and your business is critical.
Connect with a member of our team to learn more about
our key person insurance.