Most business owners agree that employees are a company’s most important business asset. So what happens when the most important business asset is unable to work? That’s a question that many employers have not spent a lot of time considering.
How about you? Do you know what you would do if you or another “key person” – someone who creates significant revenue and is integral to your operations and critical to your profitability – met an untimely death or became disabled? Could your business survive?
If you have one or more key executives, top salespeople, or leaders who are so vital to your operation that losing them could trigger a financial crisis, you need to protect your business with key person (often known as key man) insurance.
What is key person insurance and how does it work?
Key person insurance is essentially life insurance or disability insurance on your key employee(s). In a small business, that’s usually the owner, the president, or a key employee or two. Your business is the beneficiary of the key person policy and if the covered employee unexpectedly dies or becomes disabled, your company receives the insurance benefit.
Employers can use the insurance benefit at their discretion to smooth the transition or cushion revenue loss. Among other things, key person benefits can be used to cover expenses or the recruiting costs of hiring a replacement person. Or, in the worst case scenario, benefits could be used to pay severance to employees and close the business down in an orderly manner.
Do you need key person coverage?
To determine if key person insurance is right for your business, ask yourself these questions:
• Could your business survive if you or a business partner could no longer be there?
• How would revenue be impacted if you lost a key person in your business?
• Would your ability to meet contractual obligations be impacted?
• How much income could you afford to lose while finding a replacement?
How much key person coverage do you need?
As with anything, some coverage is better than no coverage, so premiums can often be structured to meet your budget requirements. That being said, there are two common ways to determine your needs:
1. Buy eight to 10 times the key employee’s salary; or
2. Consider the economic value of your key employee and ask yourself, “How much money would my business lose if something happened to this person?”
The death of a disability of a trusted employee or colleague is a tragic and stressful event. Whatever you do, don’t allow lack of preparation to cause another tragedy – the death of your business. Key person insurance is an easy and affordable way to help your business maintain solvency when its most important assets are impacted.
Did you know? In addition to business insurance, Heffernan provides comprehensive estate and financial planning services for families and businesses. Learn more about key person insurance, executive bonus plans, buy sell agreements and more here.