Have you ever thought about how a key employee or executive's death or disability might affect your company?
You can prevent unexpected tragedy from harming your company by purchasing key person insurance!
Key Person insurance is an insurance policy purchased by a company on a key executive or staff member actively working at that company. It's purpose is to compensate a business for any financial losses that would arise from the death or extended incapacity of an important member of that business. Often referred to as key man insurance or key woman insurance, insurance policies may pertain to various types of life insurance or disability income insurance.
A Key Person policy's term does not extend beyond the period of the key personís usefulness to the business. Keyman Insurance policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.
Many businesses have a key person who is responsible for the majority of profits, or has a unique and hard to replace skill set such as Intellectual Property that is vital to the organization. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.
Some Examples of Why to Purchase Key Person Insurance
You should consider "Key Man" coverage as a part of your business insurance program. Specifically, you should consider the coverage when any of the following apply to your business:
- Your business is a professional services business and key employees cannot be replaced expeditiously because of legal or ethical restraints. For example, a law firm or medical office cannot replace a twenty-year veteran with a new graduate.
- The business cannot continue in the event of a loss of particular people. Imagine "The Dog Whisperer" without Cesar Millan. The fact is that some businesses are simply not a business without a particular person in the operation.
- Business continuity is a concern. Look at your partner's children, wife and other heirs. Do they know the business? Do they care? Are they in the same profession? Your partner's share of the business will be inherited by someone and the business may need to buy out that person's share or dissolve the business.
- Future growth or financing is possible. Most financiers and banks will require this coverage to be in place before extending any financing or credit to the company. If the company merges or goes public, this coverage will be required on top executives and board members.
- The key persons are between the ages of 30 and 55. Young key people are more likely to be disabled than die. Young key people are also the least likely to have adequately planned for their death. Thus, if your business has young key people consider this coverage because it is human nature for young people to ignore their mortality and the business may be hurt by the lack of planning.
The cost of this coverage can often be defrayed as a business expense on company taxes (see your tax professional). The cost is often cheaper because it is sold as a term product usually for fifteen to twenty years and often corresponding to the most productive work years of the employee or officer. Your company may not need this coverage, but even engaging in the analysis of whether this coverage is necessary is often helpful. Do the analysis and consider what you would if Employee X was not able to work tomorrow.