Understanding the Benefits of a Key Person Policy For Your Business

In a business, particularly for small business, the owner is not the only one the company is dependent on. As the business continues to grow, other individuals contribute to the shaping and well-being of the company. These people are known as key employees, or key persons. They play a major role in the daily operations of the business. Key persons do not necessarily have to be people in the board of directors or hold high positions in the business. These people have skills that are highly valued and in demand. Companies who are able to employ such key persons compensate them well and give incentives to keep them within their employ.

The loss of a key person in a business organisation has dire consequences. Regardless of the reason for the loss — this could be due to accidents that cause disability, serious illness or death — the business will suffer some problems. While the amount of loss may vary, your business is sure to incur some changes that can permanently hamper the business’ growth.

Business Losses and Risks

At the forefront of these losses is a hit to the business revenue. Particularly if the key person is responsible for or is part of the revenue generating sector of the company and cannot be immediately replaced. Clients and customers will see a change in the handling of the business, particularly if the key person has a signature style or approach that is evident in how the business operates.

A change in the consistency and quality of the product and services that is not favorable to the clients will not bode well for the business. It will lead to a decline in your relationship with the customers, which in turn will lead to a loss of revenue for the business. Losing revenue may render you incapable of meeting financial obligations, which in turn can put your business and even personal assets in danger.

Apple CEO Steve Jobs

Take for example the recent death of Apple CEO Steve Jobs. Considered as the key person of the company, Jobs was responsible for bringing together the creative ideas that the people at Apple come up with. With his demise, the company is expected to lose a key player which would then result to the loss of quality products the company has been known for. However, Jobs was able to prepare for this eventuality since his health started to decline.

Not all companies will have this foresight. After all, no one can tell if they will be involved in a debilitating accident or suffer from critical illness. Instead, people can take measures to safeguard against these situations.

Key Person Insurance

People buy insurance for themselves in order to have something to fall back on in case something happens to them. Insurance can help with expenses when they are unable to report to work. In worst case scenarios, insurance will provide for the families they leave behind.

Key person insurance is similar to a regular, personal insurance. When a company takes an insurance policy against their key persons, they do so for the company’s protection. The business pays for the insurance premiums and stand as the beneficiary should anything happen to the key employee.

Risks of not having key person insurance

Aside from revenue loss and the risk of your assets being taken, there are other risks involved when you do not have key person insurance for your business. Expenses will rise upon the loss of a key person, which can include, but are not limited to, the following situations:

• The recruitment and hiring of a new employee. The manpower involved in finding someone who is as skilled and knowledgeable as the former key person is quite massive.
• The costs for training the new hire. While the new hire will have the skills and experience needed for the job, they would still need to have some training to familiarise themselves with the company and its system.
• The cost of a signing bonus. A signing bonus is often given to the prospective employee to attract him to signing a contract. While optional, it shows them just how valuable they are to the company.
• The cost of transferring the new hire. In some cases, the new key employee is not from within the area where the business is located. Companies would add the transfer costs as part of the package to entice them to move.
• Coverage of any bond or liability the new hire may have with their previous company that will impair their transfer to your business, particularly if the new hire is under a contract to stay within their previous company for a certain period of time.
• The cost that is associated to providing income or assistance to the employee (if disabled) or the surviving family (if deceased).

Key person insurance on the whole provides a business with funds that can help them manage any financial risks that can come from unforeseen circumstances resulting from the loss of an important employee. The level of coverage varies depending on the needs of the business, and when properly organised, can help keep the business afloat until it is steady on its feet again.