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Business owners and other key executives spend considerable time and effort to acquire the knowledge, experience, judgment, reputation, relationships and skills that make them valuable to the business. When they die, the business loses a key member of the management team and this can have a severe financial impact. During the disruption that follows the death of a key player, lenders may cut back credit,
creditors may press for immediate payment, debtors may delay making payments, employees and customers may lose confidence, and competitors may take advantage of the situation. Large corporations are often in a much better position to prepare for key executive turnover because of sheer size and numbers.
Unfortunately, in small business situations, finding an immediate replacement with the same qualifications as a deceased owner or executive is much more difficult. It is often necessary to look outside of the business to find a replacement, causing delays, disruption and reduced efficiency. The resulting effect on business profits may further weaken the financial stability of the business.
In the absence of proper planning, the very survival of the business may be affected by the death of a business owner or a key executive. The impact of this situation can be considerably reduced if the business has purchased an insurance policy on the life of the business owner and/or key executives. If they die, the life insurance proceeds give the business working capital to meet immediate cash needs and provide a source of funds for finding, attracting, hiring,
and training a replacement for the deceased executive or to hire interim management. Key person insurance provides assurance to a small business’s creditors and employees that the business will continue even if a key person dies. The life insurance proceeds provide immediate cash to cover the business’s working capital needs and to find and train a suitable replacement for the person who died. The value of these benefits to the business should far exceed the cost of the life insurance.