- How does life insurance serve business purposes?
- June 17, 2015
In the world of business, life insurance can serve a variety of purposes for both the corporation and its employees, according to the 8th edition of McGill’s Life Insurance. These important purposes include:
-Key person indemnification
-Employee benefit plan
Key person indemnification is key when a small business relies on one person who is absolutely vital to the organization’s structure and success. In many cases, this may be a CEO or CFO of a company but may be a stockholder that holds a high level of expertise. If that individual’s loss is going to severely impact management, disrupt sales, weaken credit or repayment to the company, it is vital that financial protection is provided.
Credit enhancement is anything that can stabilize the financial position of the company and also open the doors for lending and strong banking relationships. Let’s say a business wants to take advantage of an opportunity but needs to borrow to do so and the bank is agreeable but afraid that something could happen to the key person of this project. If that person is insured, life insurance can be used as collateral.
Business continuation involves life insurance that a company or firm purchases to provide the funds necessary to continue business and cover the losses incurred in the event of the untimely death or disablement of someone critical to the business. This may be an owner, partner or other employee without whom the business may cease to operate. Any change in partnership can cause dissolution of the business so partners can be insured for their interest in company.
Employee benefit plans can provide disability, income replacement and medical costs as well as death benefits. These are the group life plans and pensions. Though under most plans, the employee is not permitted to choose the amount of life insurance. Employers may also tailor variables to meet their needs.
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