As a business owner, you can name at least one person who’s vital to the success of your business. That person’s death would cause your business to struggle to survive. Of course, this isn’t a popular topic to talk about, but planning for the future of your business is important. After all, replacing a key person requires time and money, and unexpectedly losing that person could leave your business vulnerable. Below we outline how key person insurance can help protect your business.

What Is Key Person Insurance?

Put simply, key person insurance is life insurance taken out on a key or important person in a business.

How Does Key Person Insurance Work?

As the business owner, you’ll identify who the “key people” are to your business. The business then purchases a life insurance policy on those individuals. The business pays for the key person insurance premiums and would be listed as the beneficiary on the policy. If that person were to pass, the business would receive the death benefit from the policy. The business then uses the death benefit to help pay for expenses and keep the business going.

Why Would a Business Owner Choose Key Person Insurance?

A key person is anyone that your business depends on to survive and without him or her your company could be financially threatened. There are many reasons to choose key person insurance, including when your business relies on people such as:

  • Yourself as the owner
  • Business partners
  • Top salesperson
  • Number two person in charge

What Types of Life Insurance Can Be Used?  

Generally, any type of life insurance can be used as key person insurance. There are two main types of life insurance — term and permanent.

Term life insurance is temporary coverage. This type of coverage allows you to buy coverage for a set number of years (or the “term”). Typically, term life insurance is one of the most affordable types of life insurance. The coverage ends at the end of the term or until you decide to convert to a more permanent life insurance policy.

Permanent life insurance offers protection for the long-term if premiums are kept current. Whole life and universal life are two forms of permanent life insurance. An important feature of permanent life insurance is that it can accumulate cash value, which can be listed as an asset of the business. If necessary, the cash value¹ can be accessed for business needs such as purchasing inventory, meeting payroll, or any business expansion activity.

How Much Key Person Insurance Coverage Do I Need?

Key person insurance is essentially a life insurance policy that you take out on a key person in your business. Like a standard life insurance policy, there’s no exact method to determining how much coverage you need.

As a starting point, figure out what the financial impact of losing your key person would be. Then, determine how long your business would be financially impacted after the loss. For example, if your key person is your top salesperson, how long would it take to fill the position? If you’re not sure how much coverage you need, your Farm Bureau agent can help.

Protecting Your Business

Finding ways to protect your business is important. Your local Farm Bureau agent can help discuss ways to ensure your business has the protection it needs to survive. Connect with an agent today!

 ¹Withdrawals may be subject to fees and/or considered a taxable event. Any loans from the policy’s accumulated value will reduce the accumulated value and death benefit if the borrowed funds, plus interest, are not repaid by the time of your death.

Want to learn more?

Contact a local FBFS agent or advisor for answers personalized to you.