What would you do if your most valuable employee could no longer work for your company? The sudden departure of a key team member can devastate business operations. Even if you’re confident this employee would at least give two weeks’ notice, a sudden illness, injury or death could make that impossible. But, you can control the financial impact of these unexpected circumstances with key person insurance for your business.
Businesses Can’t Afford to Ignore the Risk of Death and Disability
The Social Security Administration says more than one in eight of today’s 20-year-olds will die before reaching age 67 and more than one in four will experience a disability. These statistics mean there is a significant chance one of your workers will pass away suddenly or become unable to work due to an illness or injury.
As a business owner, you may have a difficult time imagining anything serious happening to yourself, your business partner or the employees you work with every day. However, death and disability are real risks. Just as individuals should make plans for their families by purchasing disability and life insurance, business owners are wise to purchase key person insurance.
How Death and Disability Impact Business
When a valued team member passes away or becomes disabled, most attention goes to the individual and their family members. However, business owners also need to consider the impact on their operations. Consider the following scenarios:
- A manufacturing company is thriving, thanks, in part, to the hard work of an ambitious salesperson. This employee has cultivated close relationships with many clients and landed a significant amount of business for the company. She continues to make more sales each year. Although the company has other salespeople on the team, this one employee is responsible for the biggest accounts. Then, she passes away in a car crash. The company knows it can’t make its sales quota without her. In addition, there’s a significant risk that some clients will decide to take their business elsewhere. The company needs to hire and train other top salespeople, but this will take time. In the meantime, the company is losing money.
- A security company uses a computer system that an extremely talented software engineer built in-house. The employee works for the company full-time and handles any technical issues that come up. Since downtime can put clients at risk – and because no one else knows how to deal with the technical issues – he is on call for emergencies. Then, he suffers a heart attack. His doctor says he cannot work for an extended period because he needs time to recover. In his absence, no one who knows the system is available to help clients with urgent tech problems. The company needs to train another worker or switch to another program, but in the meantime, it’s losing clients.
- A restaurant earns rave reviews thanks to a talented chef. This chef has created the menu herself and is the only one who can prepare many of the best dishes. She’s become somewhat of a local celebrity, helping to draw in crowds every night. Then, the chef is diagnosed with cancer and has to take time off from work to undergo chemotherapy. Another chef will have to fill in, but since many people come to the restaurant specifically to enjoy the dishes of the well-known chef, this will impact business.
In these situations – and many others like them – key person life insurance and key person disability insurance can provide important financial protection.
Key Person Life Insurance
Key person life insurance is also called key man, key woman or business life insurance. Like regular life insurance, it pays a death benefit to the beneficiary if the insured passes away. Whereas most life insurance policies are taken out by the insured and name close family members as the beneficiaries, key person life insurance is taken out by the insured’s employer and the employer is the beneficiary. The business owns the key person life insurance policy, pays the premiums and receives the benefit in the case of the insured’s death. Key person life insurance does NOT replace the need for regular life insurance, as these two types of coverage serve different purposes and payout to different parties.
Key person life insurance can help a business mitigate the financial impact of an essential worker’s death. You can use the funds to offset profit losses, deal with business disruption and hire or train a new worker.
Key Person Disability Insurance
For working-age individuals, disability is more likely than death, so businesses need to be prepared for a sudden illness or injury that could force an essential employee to stop working.
Key person disability insurance (also called key man, key woman or business disability insurance) can help businesses deal with the financial impact of a disability. If the insured employee cannot work due to a disability, the policy pays a benefit to the company. This disability benefit can be either a lump sum or a monthly disability benefit up to the length of the disability period.
As with key person life insurance, key person disability insurance benefits can offset profit losses, operational disruption and hiring or training costs that occur due to the loss of a critical worker.
Do you need key person insurance?
Businesses already have to buy multiple types of insurance, so you likely don’t want to spend money on unnecessary policies. However, going without key person coverage can leave you vulnerable to losses, which may cost more in the long run.
To determine whether you need key person life and disability insurance, ask yourself if your business relies upon employees, owners or business partners who:
- Are vital to ongoing operations – These are typically employees with special skills or knowledge. For example, you might have a chef who prepares your signature dishes or a software engineer who maintains your core computer systems.
- Are responsible for a significant portion of your revenue – These may be salespeople or client relationship managers who help your company make a profit.
- Would be hard to replace – Consider the time and cost it would take to recruit replacements. If this could create a financial hardship for the company, key person insurance may be a wise investment.
You can purchase key person disability and key person life insurance for a single worker, or for multiple employees if you have two or more workers who are vital to the success of your company. Depending on the carrier and the policy terms, key person coverage may also be available for business owners or partners in addition to key employees.
If your company depends on a few key people to attract and retain clients, generate revenue or deliver a proprietary product or service, consider key person insurance coverage. This can provide essential protection for your business in difficult times.
Higginbotham can help you decide if this coverage is right for your business and help to identify other coverage gaps that may be exposing your business to unnecessary risk. Get in touch with a member of our team to discover the Higginbotham difference.