Question

Describe in detail 3 of the Specialized Uses of Life Insurance in Business, including Business Continuation and Key person (key-man) insurance, highlighting the key differences between those two.

Answer 1

Business Uses for Life Insurance

Many view life insurance as a way to financially help their family when they pass. But there are many other uses for life insurance, some of these are in the business setting

1. Preventing Liquidation

If you own a business, your family may find themselves in a situation where they must liquidate your businesses assets to come up with cash after your pass. This urgency may result in them having to sell the assets for less than market value. You can use life insurance to help prevent this. The death benefit of the life insurance can give your beneficiary’s the cash they need to handle your business appropriately.

2. Key Man Coverage

For some businesses, their survival is dependent on the performance and expertise of one person. For a small company, this person is likely to be the owner.

Key man coverage is a life insurance policy that the company takes out on the key individual(s). When that person dies the death benefit provides cash so the business can stay afloat until a replacement is found.

3. Obtaining Financing

Businesses often need to borrow money when they are just starting out or they are looking to expand. The bank or other financial institution they are working with may require the owner to purchase a life insurance policy on themselves and name the bank as the beneficiary. This way the bank can guarantee payment on the loan in the event of the owner’s death.

what’s the difference between key man insurance and life insurance?

Basically, they operate generally along the same lines, but there are major differentiations. Both policies get paid for by the policy owner on a monthly basis. Both life insurance policies provide death benefits that act to dispense a specific financial payout in the event of a death. The difference between key man life insurance and regular life insurance is the architecture of the policy.

Life Insurance

Key Man Life Insurance

A life insurance policy acts to cover the insured individual and provides the death benefit to a spouse or children to personal expenses. The death benefits can bel small just to cover the final expenses of a funeral, or it can be structured to maintain the standard of living for surviving beneficiaries for a certain amount of time. Personal life insurance policies can be designed to act as an investment or to act as a protection policy;both act to protect the security of the beneficiary which is primarily the family.

Regarding key man life insurance, the key person is the one who is insured and the company owns and pays the premiums on the policy, and the largest difference is that the company is the beneficiary. In the event of the key person’s death, the death benefit payout goes to the company and not the key employee’s spouse or children. Key man life insurance policies act to inject liquid funds into the business to protect against a variety of financial losses. A company will have to scout out, hire, train and retain a new replacement employee. This is costly and the death benefit covers the expense of these burdens. The policy also provides a legal transition plan for stakeholders on how the company will continue to operate, and the policy will cover the expenses incurred during the transition. Key man insurance policies may be written to include benefits to buy out stakeholders as well. Key man life insurance protects the security of the business