Key person insurance can be an invaluable investment for a growing business. Key person insurance (or key man insurance as it’s sometimes known) offers businesses protection in the event of the loss of an essential team member. In extreme cases, key person insurance can provide enough compensation to prevent a business from closing down. However, no two businesses, key persons, and key person insurance policies are the same. With that in mind, today we’ll explain how business leaders can determine their coverage level for key person insurance:
The first thing that business leaders should do when determining their need for key person insurance is to review their personnel. Businesses may take out more than one key person insurance policy at a time –– so it’s important to identify any and all team members who bring irreplaceable (or hard to replace) value to the company. It’s possible that a business may need to designate several high-ranking individuals as key persons at once to receive adequate coverage.
In general, it is unwise for businesses to invest in key person life insurance without disability coverage as well. Key person disability insurance protects businesses should a key team member suffer an accident or illness that prevents them from working for an extended period of time. Without disability insurance coverage for key personnel, businesses may leave themselves dangerously exposed. On top of that, from a probability standpoint, it is more likely that a key person becomes disabled then dies unexpectedly.
Calculating Key Person Insurance Coverage
Once you’ve decided that you need key person insurance, the next step is to calculate the amount of coverage you require. Keep in mind that key person insurance payouts need to be substantial enough to compensate for the loss of a key person’s contributions –– as well as the costs associated with replacing them. Extensive key person insurance should account for all of the following costs/losses:
- The cost of hiring temporary employees.
- The cost of recruiting, hiring, and training full-time replacements.
- The loss of revenue and/or costs from loss in operational efficiency.
- Overhead costs of the business.
- Paying the monthly obligations on business loans.
- Meeting contractual obligations.
The cost of losing key team members is often much greater than many business owners appreciate. So insurance that doesn’t account for all of these potential expenses may prove insufficient.
You can use our key person insurance calculator here to determine approximately how much coverage you’ll need.
Key Person Insurance Premium Costs
Key person insurance premiums are determined, in part, by the key person’s salary, their contributions to the business, and the costs associated with finding, training, and hiring replacement personnel.
Additionally, insurance companies take into account the insured person’s health, age, and lifestyle habits when they calculate a premium payment. For example, it would cost a company more to take out a key person disability insurance policy on a 55-year old man who smokes regularly, than it would to secure the exact same policy for a completely healthy 35-year old woman.
One final factor that may influence premium costs is the industry of the business in question –– since some individuals in high-risk professions may cost extra to insure.
By partnering with Helm Financial, you can ensure that you receive the coverage you need for your business at the best possible price. We’ll work with you and the insurance companies to save you money, and we’ll help you develop a business succession and continuity plan that will provide peace of mind for years to come. Contact us here to learn more.
This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.