What is Key-Person Insurance and Why Do I Need it?

Protect key employees with key person insurance

Is there someone at your company—maybe even you—who is essential to the success of your company? Have you ever thought about what would happen to your company if something happens to that key person?

Most businesses have at least one key employee who is essential to the company’s success. This person may be a partner, owner, majority stockholder or another individual who is crucial to the business. If this person unexpectedly leaves the company—due to a death or disability—it could make it hard for the company to survive and prosper.

Key Person Life Insurance is designed to help protect your company from just such an occurrence. This insurance policy can help protect you from the sudden chaos of an unexpected loss or departure, giving you time and options other than shutting your doors, going through a bankruptcy or floundering through a restructuring.


Who Needs Key-Person Life or Disability Coverage?

Many companies can benefit from key-person life or disability coverage, including those that:

  • Have employees who would be extremely difficult, time-consuming or expensive to replace, such as chief executives or vital managers
  • Employ highly-skilled individuals with unique training
  • Employ people with exclusive ties to key clients, such as sports stars
  • Employ leaders with irreplaceable knowledge
  • Would lose considerable business and profit without a specific employee
  • Have narrow profit margins and would be financially distressed in the event of a key staff loss
  • Need to protect their revenue stream from loss (e.g., a hospital protecting against the loss of a high-earning, respected surgeon)
  • Would be devastated if a high revenue-producing client (e.g., actor, writer or other entertainer) died or became disabled and unable to perform


How Does Key-Person Insurance Work?

Your company purchases a Key-Person Life or Disability Insurance policy for each key employee you want to protect. The company is listed as the beneficiary on each of these policies. If the key employee dies or becomes disabled, then the policy pays the benefit to the company.

These tax-free dollars can be used for any company needs including compensation for lost business during the transition, hiring and training of a replacement employee or to finance critical business transactions. In addition, the funds could be used to buy out that key employee’s shares or interest in the company from their estate.

Should there not be a loss during that employee’s tenure, the policy can be transferred to the key employee as a retirement benefit.

Like other insurance policies, premiums are based on several factors, including the key employee’s age, physical conditions, health history and the amount of coverage needed.


Key-Person Disability Insurance vs. Key-Person Life Insurance

When most companies consider key-person coverage, they generally think of life insurance. However, the chance of losing a key person to disability is 17 times greater than losing a key person to death, and the costs of hiring a recruiter to replace the key person and training him or her for a short period could be much higher than finding a permanent replacement. This makes disability coverage a wise investment.


A Few Final Notes

When considering Key-person insurance, estimate the value of your key employees and what their loss would mean to your company in monetary terms. Meet with an insurance advisor, like Roper Insurance, to review your entire business insurance portfolio to make sure you are adequately covered in all areas and that this insurance does not duplicate any existing coverage. For example, credit insurance will cover outstanding loans and debts.

Create a business continuation plan that outlines how your business will function if you lose key employees. This will make any such stressful situations less so and eliminate hasty decision making under duress.

To obtain key-person disability or life coverage, the individual must be a consenting employee and you must demonstrate that your organization would incur substantial financial loss without him or her. To qualify as a key person, most insurers require that the employee’s salary be in the top 20 percent of the company. All key-person policies are written specifically for the named employee.

To learn about coverage options, limits and other plan details, contact Roper Insurance & Financial Services today.