| A company’s most important assets are its employees. The loss of a key employee (or owner) can devastate a business. It can be a major business interruption that is impossible to overcome. An employee with unique skills and abilities can be difficult to replace, leaving the business temporarily unable to meet the needs of its customers or obligations to creditors.
Since the death of a key person can have a dramatic impact on a business. What is one solution to help protect my company from this type of loss? Key-person Insurance.
The objective of Key-person Insurance is to financially protect the company from the impact of losing a key employee. The funding from this insurance program would go to support:
- Recruitment and training of new employees
- Replacing lost profits
- Strengthening the Balance sheet of the company
Key-person insurance can help your company by providing the necessary funds to recruit the staff needed to keep the business moving forward. Key person insurance is a life insurance policy for an owner or key employee where the company is the beneficiary. The company owns and pays for the premiums on the policy and is named as the beneficiary. When the key person dies, the business will receive the death benefit and uses the proceeds to keep the company operating, satisfying the creditor obligations and meeting the needs of it’s customers. Think of it as a financial cushion to protect the company from the devastating effects on the stability and progress of the company.
One obvious impact of a loss is the need to recruit and train a replacement person. It might take two people to accomplish the same work as the key person or owner — impacting more then just the internal structure of the organization. Finding a good employee is difficult in a normal circumstance, finding one to replace a key person is even more difficult. It will also require a lot of time, energy and expense.
The funds can also be used for replacing lost profits. The time it takes to get new staff up and running may take months to years depending on the position and needs of the company. This can have a dramatic effect on the company’s profits if the focus is internal and not on growing the business.
The funds can also be used to offset the loss in value of the organization in the event a key person dies. The company’s reputation may be built on the abilities and expertise of that key person. It may be built on the persona of the individual such as respect, loyalty, and credibility. It’s these intangibles that often make a company so successful.
It’s easy to get protection for your eligible key employees. What you need to do is:
- Identify your key employees.
- Calculate the funds needed in the event of their death.
- Purchase a life insurance policy on that person.
Your Professional Risk Advisor can assist you with determine the value of a key-employee. There is no magical formula however good planning will go a long way in developing a comprehensive program that is right for the company.
“What corporate purpose could be considered more essential than key person insurance? The business that insures it’s buildings and machinery and automobiles from every possible hazard can hardly be expected to exercise less care in protecting itself against the loss of two of it’s most vital assets- management Skill and experience.”
— US Court of Appeals
(Editor’s Note: Jason Mayer, CPCU, CIC is Risk Advisor with EHL Insurancein Poulsbo. He can be reached at 360-779-4448 or jasonmayer@mac.com.). | 