Insuring Key Individuals Adds Value to Your Business

Key person life insurance is ideally about protecting your business from the loss of a key employee or business partner, while providing value, security and incentives for key performers at your place of business. Interestingly enough, key person insurance may be the most overlooked and neglected type of coverage because it isn’t a required or highly visible product such as liability insurance or property and casualty insurance.

Most businesses have a person, or persons, responsible for the majority of the incoming business revenues. Often a founder or a business partner can easily be identified as that key person. For this reason, when insurance professionals ask you about this type of coverage, it is done so for your benefit, since not having it could have serious ramifications.

Insurance that provides necessary compensation

Similar to business succession planning, the idea behind key person insurance is to seek out and identify persons who have a skill set that may be hard to replace and adds value to the business. The goal for key person insurance is not to facilitate a buyout, but rather to compensate the business for the loss of that key person.

If substantial profits generated by that key person would cease in short order upon that person’s demise and can be attributable to a decline in your company’s overall profits, then insuring them as a means of compensating the loss of a valuable component to your success makes perfect sense.

Other considerations in evaluating the loss of an important member of your team are the cost of hiring a new person, including travel, training, plus any lost opportunities during this transition. Key person life insurance is available in both term life and whole life variations, with lots of customization available.

Another aspect pertaining to this coverage is if you’re involved in the creation of proprietary products. In this case a company needs to hire personnel with a specialized skill set. This may still include more training for employees that will play a key role in the development of your product or service. The loss of a key person under this scenario means that the money from the insurance payout can be used to recruit and train capable individuals to continue this process, hopefully without having to cease operations.

Also, if the company ends up taking out a key person life insurance policy on an individual or a number of people, it shows that the company sees them as a crucial part of the company, which only boosts morale.