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Why key person Insurance?
The most important asset in any business is its people. The ongoing profitability and sustainability and, as a result, the capital value of the business, are largely reliant on the input of the key employees in the business. Therefore, the loss of a key person constitutes a risk for the business.
What is a key person? A key person is someone whose absence through death, disability or critical illness will have a material effect on the future of the business in terms of sales and/or the high cost of replacing a skilled employee, as well as the opportunity cost in the loss of profits/sales while a new replacement is being trained.
Key person insurance, also known as ‘key person insurance,’ is a life insurance policy taken out on a key executive, employee or owner of a business. In the event of the key person’s death (or sometimes disability or critical illness), the policy pays out a lump sum to the company. This can cover expenses for new recruitment, settle debts, or provide a safety net during a difficult transition period.
The ultimate goal of this policy is to protect a business from the financial consequences of unexpectedly losing a key executive, employee or owner. It is a simple, cost-effective solution that provides financial security and certainty to the business in the event of death or disability of a key person in the business.
Have questions about whether adding key person insurance to your business’s insurance program is needed? Let Assurein Insurance assist you in making Key Person insurance part of your business succession plan!
WHAT YOU NEED TO KNOW
Who Is A Key Person In A Company?
A key employee in an organization is an individual with ownership in the organization and/or who has an influence on decisions made in the organization. Key employees are typically well-remunerated and are considered to be stakeholders in the running of an organization. Any individual with specialized skills, competence, and knowledge whose loss could result in serious financial harm to the business can be covered by this type of policy.
What is Key Person Insurance?
Key person insurance is business insurance that provides immediate cash to a company in the event a “key person” – such as an owner, high-level executive, or top salesperson – dies or is disabled unexpectedly. Unlike traditional insurance that is purchased by the insured person and they name their own beneficiary (typically a family member), key person insurance policy is purchased by the business and the business will be the beneficiary of the insurance payout in the event of the key person’s death. This offers assurance to owners and investors that the company will have the cash to continue operations without interruption if a key person is lost.
How Does Key Person Insurance Work?
Key Person Insurance policies protect a business, not an employee. A company makes an application for insurance on a specific owner or critical employee (the “insured”). The business is the owner of the Key Person insurance policy, pays the premium, and is the beneficiary in the event the key person dies. Companies will then typically use the funds to recruit a qualified replacement or to cover short term revenue deficits.
Does My Business Need Key Person Insurance?
If your business would suffer dramatically if one of your key employees died or became disabled, your company needs key person insurance coverage. Most small businesses need this valuable coverage as they often depend heavily on one or two people. Other reasons companies may need key person insurance include the need to secure a business loan (often key person insurance is a requirement of approval), provide funding for a family-owned business buy-out in the event of the death of a business partner, complete business succession planning, and fund executive benefits.
How Much Key Person Insurance Do I Need?
It is difficult to quantify the financial value of an employee as there are many contributing factors to determining key person insurance cost. Of the multiple methods available to determine a valuation, the most common is the “multiples of income” approach. This is calculated by multiplying the employee’s salary (including benefits) with a multiplier – generally 5-7 times. Of course, there are additional factors to consider including employee’s direct contribution to company revenue or the amount of time it would take to find and train a replacement.
What Happens When The Business Is Sold or No Longer Operating?
If a business changes hands, the new business owner now controls the key person insurance policy. In most cases, if the insured remains with the company and that person is critical to the organization’s success, the coverage is maintained. In situations where the insured was a former business owner, the policy is transferable to a personal plan, or it can be terminated contingent upon the terms of the sale of the company. If a business-owned life insurance policy is in effect and the business closes, plans are generally not going to be renewed and will lapse due to non-payment.