Who is a Key Person?
Every business has employees who are highly trusted, knowledgeable, and experienced. A key employee is often a combination of those three characteristics. All businesses—regardless of their size—have at least one key person. This person is absolutely crucial to the life of the business. Many small businesses employ multiple key people. It might be the owner or founder of the company, or it may be a supervisor or manager who has been with the company for years. Or it might be that dynamic and prolific salesperson who brings in the bulk of your income.
What is Key Employee Insurance?
Key person insurance is a business insurance policy—similar to a life insurance policy—which is taken out to protect the business from the loss or long term incapacity of a key executive or employee of the company. It is often referred to as "key person life insurance", “key employee insurance”, “key man insurance”, “key woman insurance”, or “business life insurance.”
Often used to insure management and ownership, key person insurance is being used more and more to insure employees who make significant contributions to the operation of a business. For instance, a top salesperson who represents a high percentage of the company’s revenue may need to be considered for key person insurance.
While there is no clear definition, this form of business insurance has become very popular and sometimes required by a lender to secure financing for the business.
What Does Key Person Insurance Cover?
We’ve already established that a key person is an individual that is highly important to the continued operation of a business. A key person insurance policy comes into play in the occurrence of death OR the permanent disability of the key employee. In the event that this happens, the company will be paid benefits which can include:
- The time and cost it takes to hire and train someone to take the vacant position to continue the business
- To cover lost profits while a suitable replacement is hired and trained
- To cover costs while the company is sold and profits are disseminated to shareholders of the company
By minimizing the impact of the death or loss of a key employee due to disability, creditors, customers, and employees are assured the business can continue to operate with minimal impact and operate as usual.
How is Key Person Insurance Different than Life Insurance?
Key person insurance is sold as life insurance and also as disability insurance. The key difference between this policy and a life insurance policy is that the business pays the premiums for the policy and the business is the beneficiary of the policy. Any proceeds disbursed by the policy are necessary to continue operation of the business. In short, key person insurance allows the company to continue to function by paying the company for the loss of your key person and/or people.
How to Determine if Your Business Needs Key Employee Insurance
A small business should consider purchasing key employee insurance if:
- Would the loss of the employee sink the company?
- The business cannot function without the owner, key executives, or key employees
- You want your business to have an alternative to bankruptcy
- You are required to purchase key person insurance policy for a business loan
- Key person insurance isn’t usually necessary if you are the sole proprietor of your business.
Small businesses are at a greater risk in the event of key employee's death or permanent disability. Many cannot survive long if they lose the person who is the driver of their success. That's why this insurance policy can be so important—it protects the life of your business.
NOTE: In order to obtain this policy through an insurance company, the employee(s) in question must agree and allow the business to purchase this life insurance.
How Much Coverage Does My Business Need?
Because a business pays the premiums for key person insurance, that business must determine the policy premiums that they can afford. Many life insurance companies offer $100,000 policies up to $1 million policies. Talk with an agent to receive a quote for each level of coverage from the insurance company of your choice.
Get a Free Key Person Insurance quote
You will want to meet with a licensed insurance professional to decide the amount of the benefit, who your key person or people are, and how much you should be paying in premiums for your key person life insurance. You will also want to discuss whether you want to cover the risk of your key employee(s) death or disability. Or both. At CommercialInsurance.Net it's our mission to connect you with the right insurance company for your small business.