Key Person Insurance
Why Key Person Protection?
People are often a company’s biggest asset and losing a key person can be very damaging. The business could be hit by a loss of profit, reduced sales, recruitment/training costs, or disruption to their plans.
That’s why key person protection makes good business sense. To help reduce the financial impact on their business, an employer can take out a life insurance plan, with or without optional critical illness cover, to cover the life of the key person. This plan is owned by the business, they pay the premiums and any pay out is made to the business if they find themselves in the unfortunate situation of needing to make a claim.
The company can use the insurance proceeds for expenses until it can find a replacement person. In a tragic situation, key person insurance gives the company some options other than immediate bankruptcy.
If the company is a sole proprietorship and employs just you and no other employees or has no other people who depend on it, then key person insurance isn’t as necessary. You’ll notice we didn’t mention your family–don’t confuse key person insurance with personal life insurance. If you have a spouse and/or children who depend on your income, then you should have personal life insurance for that purpose.
How do you determine who needs this insurance? Look at your business and think about who is irreplaceable in the short term. In many small businesses, it’s the owner who holds the company together–he may keep the books, manage the employees, handle the key customers and so on. If that person is gone, the business pretty much stops.
How much key person insurance do you need? That depends on your business, but in general, you should get as much as you can afford. Then think of how much money your business would need to survive until it could replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits into your budget and will address your short-term cash needs in case of tragedy.