Almost all businesses have a person or a few people in the the business that are imperative to the success of the business. If something should happen to these people the business would suffer. The best question I have heard to get business owner to think about these people is to ask them, if you were away, who would be at your business to turn the lights on? Obviously we are not referring to the actual lights but who will make sure the business still operates like normal. 

Almost all businesses especially small businesses should consider take out this type of policy on its key-employees. These policies allow the company to recoup funds that it would otherwise lose if the key person died suddenly and the business could not immediately continue to function properly.

The company purchases the policy and pays the premiums. Rather than a person as the beneficiary, the company is the beneficiary.

A firm can use these funds in several ways since the insurance benefit comes from a tax-free death benefit. The death benefits may be used to pay expenses until the firm can hire an appropriate replacement for the key person’s position or any other purpose. These options for use of the money provide the corporation or small business with the ability to recoup losses associated with the loss of a key employee. 

Who Qualifies as a Key Person?

It's important for business owners to analyze the company to determine if the loss of an employee will cause a significant financial hardship for their business. In a small business, this is could include the owner, top sales people, executives and managers. In larger businesses, this could be some of the members of its leadership staff or even key creative minds or engineers in the firm. In a law firm, each of the partners, but especially the founding partners, could be considered a key person.

The bottom line, there is not qualification to be a key employee. It is really up to the business owners and their leadership to determine who is essential to the success of the business. The only thing a business owner needs to ask is, if this employee is gone will my business suffer a financial hardship, if the answer is YES, they should consider key-person insurance. 

Policy Sizes and Types

These life insurance policies can offer a death benefit generally of up to 10 times the key employees salary for the year.  The policy size needed depends on the business, its financials, and what an owner can afford in premiums. Businesses should focus on how to address cash needs in the short-term and get back to business as usual.

A budget must be created for personnel search. It could take months to vet, interview, and hire a suitable replacement. These and other questions remain paramount to successful succession planning. Key person insurance provides one aspect of your insurance strategy. In addition to the costs associated with hiring a replacement, the business owner should consider how much in lost revenue the business will have due to the loss of the key-employee.  

Consider a Combination Plan

Generally if an employee is important enough to consider purchasing a key-person life insurance policy on them, the business should consider setting up a gold-handcuff style benefit for the employee. By leveraging a cash value life insurance policy the business can also set up a plan to incentivize a key employee to stick with the employer because they will be rewarded. While this is an important topic it is probably beyond the scope of this blog - I will post more about this at a later date.