There’s an adage in business that no one is irreplaceable. But in nearly every company, there’s at least one person whose contributions are so essential that their unexpected death would be devastating to the future of the business. Taking out a life insurance policy on those essential employees — what’s known as key person life insurance — is a way a company can protect itself from the impact of losing a key employee.
“You never want to think about something terrible happening to anyone, but if it does, this is a way you can be sure your business will continue,” says Deb Welsh, a life risk consultant at Clark-Theders Insurance Agency Inc. “It’s not just about one person. It’s a way of making sure your business as a whole is protected.”
Whether it’s a founding business owner with years of institutional knowledge or a chief engineer who makes your technology possible, key person insurance can be a lifeline to a business in a time of crisis, she says.
Smart Business spoke with Welsh to learn more about this simple but essential business-protection tool.
When is key person life insurance something to consider?
Key life policies are part of a business continuation or succession planning process, so it’s an important component of protecting the ongoing life of a business.
It might be two partner-owners who want insurance on each other so the business can continue if one of them died. But it doesn’t have to be an owner. It could be a sales director who’s critical to maintaining revenues. Maybe it’s a person who maintains your key vendor relationships.
Having a key life insurance policy on that person ensures that you will have the resources to cover lost sales, find someone to take his or her place or pay off debt. You want to avoid any period of time where you’re wondering, ‘How are we going to replace this person and make up lost revenue?’
How are these policies usually structured?
The policy is written on the life of the key employee. The person is the insured, but the business owns the policy, pays for the policy and is the beneficiary of the policy.
Why don’t more companies utilize key person life insurance?
The biggest reason is that it’s not a high priority. Business owners have so many things coming across their desks every day that they don’t necessarily have the time or realize how important it is to have this in place.
In general, life insurance is often something we don’t want to talk about even though we know we need it. Key person insurance policies are one of the biggest things lacking in most companies’ insurance profiles.
Also, the perception is that the cost will be more expensive than it actually is. As a hypothetical example, a 40-year-old healthy male covered for $500,000 on a 25-year term would carry a $740 annual premium. That’s a small amount of money to pay to cover one of your most important employees.
What do you tell business owners about why key person life insurance is so important?
It gives a sense of security to your employees, your clients and your vendors. If you have a large vendor that you use frequently, you may have a significant amount of debt with them. This policy can help give the vendor security that if something were to happen, they would still get what you owe them.
It’s also a way that other employees will know that you’re putting things in place to ensure a future for your company. They won’t have to worry about waking up and finding out that the sales director is gone, and wondering what that will mean for the business and their jobs.
You’ve put your life into your business. You never want to think of something terrible happening to anyone, but if it does, this is a way to know the business can continue.
Deb Welsh is a life risk consultant at Clark-Theders Insurance Agency Inc. Reach her at (513) 644-1280 or [email protected]
Insights Business Insurance is brought to you by Clark-Theders Insurance Agency Inc.