Losing a key employee can cause significant negative financial consequences for a business. Sometimes, it can be a devastating or even crippling blow.
In a survey of small business owners by the National Association of Insurance Commissioners, nearly three-quarters of the owners surveyed said they are very dependent on one or two key people within their companies. However, less than one-quarter of respondents had key person life insurance in place.
What exactly is it? Key person insurance is simply life insurance coverage on a key employee. In a small business, that could be the owner, a founder, or any of a number of important employees. The business takes out the policy, which pays out in the event of the death of a key employee(s). Business owners also can purchase insurance that would provide coverage in the event not only of the death of a key employee but of disability.
When should you consider key person insurance coverage? If the loss of a specific employee would cause a massive or crippling setback for your company, it’s definitely coverage you should consider. Perhaps you have a salesperson who generates all or most of the new business for your company. Or a founder who is linked to the company’s reputation. Perhaps someone has unique skills and/or knowledge. Sometimes employees are so critical to the success of your business that they are in a word, irreplaceable. Additionally, companies owned by two partners may find this type of coverage useful for financial planning purposes.
Most of the time, companies can elect whether they want to purchase this type of coverage. In some cases, a lender will require this type of coverage is in place.
It’s common for larger enterprises to have specific protocols for ensuring business continuity in the event of the loss of a key employee, with key person insurance being one component of that plan. It’s just as important to have those same safeguards for a small or startup company. Key person insurance can help a small business take the steps necessary to move on after the loss of an important employee, including the process of recruiting a new employee or employees and weathering any loss in revenue or overcoming another type of financial setback related to the loss of that person.
There are different types of key person coverage that can be acquired based on a company’s unique needs. Does your company need this type of coverage? We can help explain your options for making sure your business survives the loss of a key employee — or even you. We’re here to help!
