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How Term Insurance Can Protect Your Business from Key Person Loss

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Term insurance for a key person helps protect the financial interests of an organisation in the event of losing a key individual.

A key person is someone whose absence could create a significant financial impact on a business. Even in businesses run by multiple people, there are some individuals who are more important than others when it comes to the day-to-day running of the enterprise. The loss of these persons can significantly affect the company. In such cases, term insurance can be used to help firms bounce back from losing their key people.

Find out more about this type of term insurance and how it can help businesses recover in case of an unexpected event.

Understanding a key person

Any employee who plays a critical role in a company to ensure it runs smoothly and achieves its profit targets is valuable for the company as a resource. There is no specific legal definition of a key person, which means that anyone within a business, from the Chief Executive Officer (CEO) or president to the marketing head or a salesperson, can be considered one.  

What is a key person term insurance plan?

A key person term insurance plan safeguards a business from the financial ramifications of losing a key individual. The absence of such a person can incur various costs for the company, including a negative impact on profits, the need to recruit a replacement, a potential loss of stakeholder confidence and increased financial stress.

This type of term insurance plan offers financial compensation to the business in the absence of the key individual to address all of these concerns. 

This specific type of term insurance can be bought by an employer for an employee. The premium is paid by the employer, and the death benefit is also given to the employer.  Organisations can easily weigh how much they’ll need to invest in a policy’s premium against its benefits by using Online term insurance calculators, and settle on a plan that’s beneficial for both parties. These free to use tools are available on the websites and mobile apps of leading insurance providers. Some providers might refer to these under the tag of “term plan calculators”.

Benefits of a key person term insurance plan for a business 

1. Offers long-term financial security

This type of term insurance plan is an ideal means to ensure the long-term financial security of a company. Typically, the maturity date of such term plans coincides with the employee deemed critical to the company’s working, retirement date or the end of their employment contract with the company.

This ensures the business’s uninterrupted coverage and financial protection throughout the employee’s tenure. The terms can extend for the entire duration of the person’s employment, thus promoting the long-term financial stability of the business.

2. Protects the business

The business is the nominee for a key person term insurance plan. This means that in the event of an unfortunate incident during the policy term, the sum assured is paid to the business rather than the employee’s family members.

This financial support enables businesses to maintain their operations in the absence of such a critical employee. The funds can be used to hire replacements and cover the losses incurred due to the employee’s untimely demise.

3. Helps motivate employees

Apart from providing financial assistance, a key person term insurance plan can benefit the company in several other ways. When companies purchase such term plans for select individuals, it highlights the contribution made by the employee. This, in turn, motivates them to work harder and strive to repay the company with their performance and dedication, ultimately benefiting the company.

Many companies insure their top employees with such insurance plans to motivate them and boost their morale. These plans can serve as a significant stimulus to enhance the overall profits of the business.

4. Broad financial coverage 

The sum assured for a key person term insurance plan is determined based on the insured person’s salary and contribution to the business. This approach enables companies to select a sum assured that appropriately compensates for the loss of an employee.

Companies can assess the potential cost of the individual’s absence to the business by evaluating their work and income. Subsequently, they can choose an amount that accurately reflects the business’s needs.

5. Saves money through tax benefits

Buying this insurance plan can contribute to the savings of a business through tax benefits. The premium paid towards a key person insurance plan can be claimed as a business expense, qualifying for tax deductions under Section 37 (1) of The Income Tax Act, 1961. This can help reduce the organisation’s tax liability for the concerned financial year.

However, it is essential to note that the death benefit received from a key person insurance plan is treated as a business profit under Section 28 (vi) of The Income Tax Act, 1961, and is, therefore, taxable.

6. Boosts confidence in other stakeholders

Stakeholders, such as investors and sponsors, may lose faith in a business in the absence of employees deemed critical to the company’s working. This loss of confidence could lead them to withdraw their funds, exacerbating the company’s losses in addition to losing a valued employee.

However, companies can maintain a better reputation with a key person term insurance plan. With insurance, stakeholders have more confidence in the business’s ability to recover, leading to financial stability for the organisation.

Conclusion

A key person term plan can be valuable for companies of all sizes, whether big or small. These plans not only provide peace of mind to employers but also motivate employees to work harder and hustle for success. Overall, this can have a positive impact on both parties.

Moreover, key person term insurance stands out as an affordable protection tool with tax benefits and budget-friendly premiums, making it easier for companies of various scales and sectors to purchase it.  


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