How to insure against loss of key company employees
The loss of a key employee can jeopardize the operations of a business. If you run a small business and a key employee becomes incapacitated, passes away, or quits, it can especially leave the company’s future hanging in the balance.
However, just because the loss of a key employee can hurt your business doesn’t mean you can’t take certain steps to mitigate the risks. In this guide, we explore how to insure against loss of key employees. Let’s dive in!
Identify Your Key Employees
The first step is to figure out who your key employees are. There’s no hard-and-fast rule for who a key person is in a business.
Anyone who contributes significantly to the company’s bottom line is considered a key person. A simple criteria you can use to identify key persons include identifying:
- Who among the business owners, company employees or contractors has specialized skills, and whose absence would cause a loss to the company?
- What loss would the business incur in the absence of these people? (Skills, goodwill, sales, customers, etc.)
- What actions would you take if these people weren’t around?
In general, a key person can be the company’s C-Suite Executives (CEO, COO, etc.), top sales personnel, key project managers, or any other difficult-to-replace personnel.
Strategize to Insure the Business
After you identify your key employees, it’s time to roll out an insurance strategy to avert a potential disaster in the event you lose those key persons. For this, there are two generally accepted policies, including:
Key person life insurance
Key person insurance (sometimes referred to as key man life plan) is a form of life policy that a company takes out on the life of a key person (or key people). The company pays the premiums and typically owns and controls the policy.
This type of insurance policy pays out liquid funds to the business in the event the insured key person passes away, as opposed to that person’s beneficiaries.
The policy’s death benefit is often used to cover the costs of recruiting a worthy replacement for the deceased key person.
If the company is completely unable to continue operations due to the death of a key person, then the money may be used to provide severance benefits to employees, compensate investors, pay off any other deaths and close down the business in a peaceful manner.
Key person disability income insurance
Key person disability income insurance pays a lump sum or steady income if a key person becomes totally disabled and unable to work. The policy can be owned by the company, the owner of the company, or the partner.
Key person disability benefits can be used to cover temporary staffing costs, offset the cost of finding a replacement, or show financial stability and credit worthiness to various stakeholders (shareholders, creditors, customers, etc.) for the continuity of the company.
Important: A key person life coverage doesn’t prevent an employee from purchasing a separate individual disability cover to protect his or her income.
Calculate the Insurance Cost
How much coverage is enough? This will vary depending on the size and nature of the business, the key person’s role, and the financial loss the company is likely to incur if that person dies or becomes incapacitated.
Policies will also vary between insurance providers. You will come across quotes on $100,000, $250,000, all the way up to $1 million.
It’s worth comparing quotes between insurers to find a quote that balances between the protection needs and what the company can actually afford.
The cost will also depend on what type of life policy best fits the company. There is term life policy, which provides coverage for a set period, and permanent life policy, designed to provide coverage for a key person’s entire lifetime.
For term life policy, the cost of coverage will vary by the insured person’s age and overall health, just like many other types of life insurance policies.
For instance, an insurer may charge $100 monthly premium for a $500,000, 20-year term life policy on a healthy male aged 50 years. Raising the same coverage to $1,000,000 would raise the monthly premium to $190.
Conclusion
Insuring the company against loss of a key employee is easily the best way to ensure the continuity of business should the unfortunate happen.
You want to evaluate your key company employees, measure the value they bring to the business, and the possible impact of their passing away to your business.
Only then will you be able to find adequate life insurance coverage that allows business continuity in the wake of a key person’s untimely death or disability.
