But suppose you lose an employee that is integral to your business like they have to leave their position unexpectedly or pass away.
That’s where business life insurance steps in. These insurance products will financially support this transition so you can focus on healing and keeping your business going. Here’s an overview of two key products: Key Person Life Insurance and Buy-Sell Agreements.
Key Person Insurance
Every employee is essential for making a business run. But no doubt, you have some employees with a lot of institutional knowledge. They may have been there since the beginning of the business. They may be highly specialized in their job. Or they’re responsible for bringing in the bulk of your sales every month.
But what would happen if they passed away or had to leave the company? That’s why Key Person Insurance, sometimes called Key Man Insurance, is essential.
Key Person Insurance is a life insurance policy for businesses. Companies can take these out on the owner of a business, an executive, or a critical person to a business’s operation.
Suppose that person passes away or there is a sudden departure from the company. The funds from that insurance policy will support another person stepping into that role. It can cover the costs of recruiting, hiring, and training a replacement for that key person.
In short, this will keep the business afloat while you find a substitute for the loss of a key employee.
Let’s illustrate this with an example. Rustic Home Furnishings produces handmade wooden furniture and employs six people. One of the lead employees is an excellent furniture maker, manages the finances, and has worked there since the founding. This unique set of skills and knowledge is critical to the business’s success.
But sadly, this person passes away unexpectedly. With a Key Person Life Insurance Policy, the company would get financial support to replace this person and keep the business running. It covered expenses from recruiting and training a replacement, paying off debts or loans, and covering lost profits. Without Key Person’s Life Insurance, this could create a substantial financial and operational impact on the organization.
“In these situations, it’s sad to lose a valuable employee,” Curt Peterson, an insurance agent at Bank Midwest, explains. “The good thing is there is a way to help the business recover from that and hiring a new person with a key person policy.”
Buy-Sell Agreements are an essential life insurance policy and legal arrangement, especially for co-owned businesses and farms. These agreements outline how a partner’s share of an enterprise is distributed if that partner dies or leaves the company.
These agreements are typically created to communicate that available shares of a business will be sold to the remaining partners. As a life insurance policy, Buy-Sell Agreements typically fund a buyout of shares in case of a partner’s death.
Let’s look at another example. Let’s say two brothers work together to farm owned and rented land. As part of their succession planning, they created a Buy-Sell Agreement that outlines that, in the case of one of their deaths, the other brother would receive funds from the agreement to buy out the other brother’s investments in their land. It would also keep the power of the farm enterprise between either of the two brothers and keep out unwanted influences in the business.
It’s important to note that Buy-Sell Agreements are not the same as a succession plan. These are tools that business owners use in case of emergencies and unexpected situations. In our example above, the brothers protect businesses and business owners from tangible consequences, like losing the land.
How To Get Started
Insurance is an investment that protects your business from the worst-case scenario. And it’s impossible to plan for all those unexpected cases alone, especially if someone integral to your business isn’t there anymore.
That’s why you have a team of professional advisors, from your bank lenders, insurance agents, attorneys, and CPA, who work with you to create these emergency plans, keep your business humming, and focus on the life side of your life.
Contact your insurance agent to get started on protecting your business.
Are you looking for more advice for protecting and growing your dream business? Listen to Dream, Plan, Live: the Bank Midwest podcast for more tips from the business experts in your community and at Bank Midwest.