Does Your Small Businesses Need Key Person Insurance?

Most small businesses have one or two key people who are crucial to the day-to-day operations. These key people frequently are the business owners or founders, and it is their job to manage the books, take care of major clients, hire and fire employees, and stay on top of the sales department.

What would happen if your company lost these key people because of injury, disability, or death? Would your company fold, or would there be a transition that would save the company and the employees still working there? Investing in key person life insurance, also called key man insurance, could help your company if a key person or key people were suddenly unable to continue to work.

What Exactly Is Key Person Insurance? 

At least one person is critical to your business operation, and without him or her the company would be in dire straits. You should take out a key person insurance policy on that owner or employee in the event they die unexpectedly. Your business purchases a life insurance policy on the key person, makes all the premium payments, and is named as the beneficiary. If the key person named on the policy dies, the company receives the insurance payout. This allows the company to keep operating while searching for a replacement. The insurance money can be used to pay bills, purchase supplies, and for multiple other purposes. In the event it is felt the business cannot go on, the insurance payout prevents bankruptcy by making it possible to pay off debts, pay severance to employees, and close the business without causing financial hardship to anyone. 

Does My Business Really Need It?

It’s important to evaluate your business and determine what would happen if a key person were to die. Is there anyone qualified to replace him or her? Would certain aspects of the business be placed in jeopardy due to the loss of this person? Would the business have to shut down if an owner or other key person died? Would the company have to file for bankruptcy? The answers to these questions will help you decide if you need key person insurance on one or more people in your organization. Age should never be a factor in determining if someone should be insured. Make that decision based on the individual’s value to the company.

How Much Coverage Do I Need? 

The right amount of key employee insurance varies from one business to the next. There are, however, some basic criteria you can use to evaluate what size policy you need:

  • Replacement costs: How much would it cost you to hire and train someone to replace a key employee? How much revenue might be lost in the interim?
  • Business income: How much profitability does the key employee add to your business? Multiply this figure by the number of years it would take for a replacement employee to contribute that same amount.
  • Compensation: How much is your key employee earning? Multiply this factor by five or 10 to give you a ballpark idea of how much key employee insurance is necessary.

Still not sure if your business needs Key Person coverage? Our team is here to help. Visit our Business Insurance center to request your free quote: 

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