Key Man Insurance Defined

As a small business owner, you are in charge of everything that goes on around you. From the daily operations, to keeping the books and making sure your stock is up to date, you have to be hands on in just about everything. Not to mention that you must ensure your staff is on the up and up, and are happy with what they are doing in your business.

Employees are among the biggest influences on whether a business can thrive or fail. A good product or service can only go so far, particularly if you are in the retail business or if you are running a customer-oriented businesses. Employees can help sell your product; as well as ensure that the wheels of the operation are running smoothly.

Key Persons in the Business

As your business grows, you start to delegate tasks to various people. Your staff grows, and later you start to have people whose ideas and skills are important to the continuity of the business. These people are called key persons, or key employees.

A key person is someone who has much to offer towards the growth and improvement of the company. Aside from the owner, key persons can be anyone in the company who is crucial to the business and makes a considerable contribution to the operations. They can be the co-founders, members of the board or any employee who has considerable skill that is well-valued by the company. You know that an employee is a key person when their absence creates a gap in the business.

Key persons are assets to the company. They have skills that help the business thrive. These skills are varied, from managerial to customer service, to technical and creative. Regardless of what their contribution is, they are considered to be the most valuable employees of the company.

What is Key Person Insurance?

Key person insurance is life insurance taken on the key person in a business. It protects a company in the event that anything happens to the people who are important to the business operations. These instances can be any of the following:

• Disability of the key employee as a result of an accident or any mishap
• Incapability to work due to prolonged or serious illness
• The untimely death of the key person

Any of these can result in a break in the business workflow. This position must be filled as soon as possible to ensure continuity. The company stands as the main beneficiary with key person insurance.

Note that key person insurance is different from personal life insurance. The latter is paid for by the employee and ensures that they are covered should any accident occur. It also ensures that their families are taken care of should they unexpectedly pass on.

How does Key Person Insurance Work?

When a company takes out a life insurance policy on its key persons, they pay the premium and is the beneficiary of the policy. If something happens to the key person, the company receives the pay out from the insurance company.

Why get Key Person Insurance?

Key person insurance mainly helps protect the business in case a key person is disabled or dies unexpectedly, which leaves a huge gap in the business operations. The insurance proceeds can be used by the company in several ways, depending on the situation.

• In cases where the loss results in the company shutting down, the proceeds can be used to pay off debts. It can also be used to fund severance checks to employees.
• The company can use it to pay off debtors.
• The insurance proceeds can be used as funds for the recruitment and hiring of a new employee. The money can be used to fund training, incentives and possibly fund the employee’s transfer if they live outside the area where the business is located.

Key person insurance can offer a cushion to the business, particularly if the loss is substantial. It can act as an anchor as the company goes through the process of stabilising itself and help gain footing until it is able to operate on its own again.

How to determine who needs the key person insurance?

In order to ascertain who in your organisation needs key person insurance, you need to evaluate the people and their contributions. Who among your employees have skills that are hard to come by (either through education or through experience)? How long will it take for you to find someone to fill in their shoes? Does this person have a strong impact in the business operations? If that person is no longer around, will the business run as smoothly or will it come to a grinding halt? Asking these questions will help you know who is a key person in your group.

It is never presumptuous to prepare for emergencies. We set aside money for savings, and we purchase things we put aside for those “just in case” situations. Insurance is quite like that, and getting a key person insurance policy will give you the peace of mind knowing that your business is well cared for.