Businesses take out loans all the time. Some businesses use loans to purchase expensive equipment. Others use loans to facilitate growth, while still others simply use loans to cover common operating expenses. However, every time a business takes out a loan, an element of risk is involved. One of the worst things that can happen to a company is the sudden loss of a key team member. If, for instance, the head sales professional of a company were to die unexpectedly, a business with significant loan payments might not be able to cover those costs as a result.
Fortunately, business loan insurance works to protect the financial standing of an organization in the event of a key team member’s death or incapacitation. Here we’ll explain everything business leaders need to know about business loan insurance and how it can benefit your organization.
What Does Business Loan Insurance Cover?
Business loan insurance –– AKA key person insurance –– provides businesses with financial support in the event of the death or incapacitation of a designated “key” team member. While payouts from key person insurance can absolutely go toward paying off business loans, key person insurance can also cover a wide array of business expenses including:
- Cost of hiring temporary personnel.
- Cost of recruiting, training, and hiring a permanent replacement.
- Losses incurred from sales or revenue on time-sensitive projects.
- Losses incurred as a result of a business’s inability to grow.
- Losses incurred by shareholders or partnership interests.
- Overhead costs.
- Contractual obligation costs.
- Cost of buying out the shares of a disabled owner.
How Does Key Person Insurance Work?
Key person insurance is a life and disability insurance policy that a company takes out on an important team member. This person may be the CEO, or even the owner of the company. Typically, this key person will have highly specialized knowledge, or be responsible for a substantial amount of a business’s income. However, there is no hard-and-fast criteria for selecting a key person. And businesses can designate multiple individuals as key team members.
Once a business identifies a key person, it can then take out a life and disability insurance policy on them. In this arrangement, the business itself pays the premiums of the policy and acts as the beneficiary in the event of the key team member’s death or incapacitation. As discussed above, payouts from a key person policy can be used in various ways.
Key Person Insurance Cost
How much a key person insurance policy costs depends on a number of factors. To begin with, the key person’s health may influence the cost of key person premium payments. (Remember, key person insurance is a life and disability insurance policy. So if a key person smokes, for instance, the premium rate may be higher than it otherwise might be.) In addition, the amount of coverage required will have a big impact on the ultimate cost of a key person policy. How much a key person contributes toward annual revenue, for example, will likely influence the amount of coverage required. Other factors include the cost of replacing a key employee, and, of course, monthly loan obligations.
Benefits of Business Loan & Key Person Insurance
It’s not an exaggeration to say that –– in certain instances –– key person insurance can protect growing businesses from financial ruin. Key person insurance acts to safeguard organizations against unexpected losses. Payouts from key person insurance policies can provide businesses with vital funds needed to pay off essential business expenses –– including loans. This, in turn, allows business leaders to take out loans, invest in their organization with confidence, and plan for long-term growth. Key person insurance is a vital aspect of business continuity planning.
At Helm Financial, we have years of experience helping businesses just like yours secure key person insurance and develop excellent succession plans. Through our WayPilot Program, we can help you find the best possible coverage at the best possible price. It’s never too early to start thinking about your business’s future –– so contact us here for a quote to get started today.