It’s no exaggeration to say that having key person insurance could save large businesses hundreds of thousands of dollars (if not more) and save small companies from going under completely. Yet, plenty of capable business leaders may not exactly understand how key person insurance works.
Today, we’ll aim to clear up some of that confusion and answer the question, what does key man insurance cover? Equally, we’ll look at some scenarios that are not covered under key person insurance policies.
Key Person Insurance 101
A “key” person is any individual in a business that is integral to its current and future success. This professional may be an executive, a CEO, a manager, or a leading sales professional — to name a few examples. Not only are key professionals responsible for the business’s day-to-day viability, but they may also be extremely difficult or impossible to replace. Losing such a key person could cost a company a significant portion of its revenue and/or operational efficiency while the company recovers from the loss. Key person insurance, then, is a life and disability insurance policy that a company can take out on a key person or persons. The company acts as the beneficiary of the policy and therefore covers premiums and other payments in addition to collecting any compensatory pay-outs.
A “key” person is any individual in a business that is integral to its current and future success.
What Key Person Insurance Covers
Key person insurance is a life and disability insurance policy. This means that should a key person die, become seriously ill, or become unable to physically perform their job, the company would be able to collect on their policy. Just how much a company will be able to collect depends on a number of factors — such as the company’s overall revenue, the key person’s salary, their personal contribution to business revenue, and how long it will take to replace that key person.
Key person life insurance payouts cover a variety of potential losses including:
- Cost of hiring temporary personnel.
- Cost of recruiting, training, and hiring a permanent replacement.
- Losses incurred from sales or revenue on time-sensitive projects.
- Losses incurred as a result of a business’s inability to grow.
- Losses incurred by shareholders or partnership interests.
- Overhead costs.
You can use our free key man insurance calculator to determine the approximate range of the level of insurance coverage you’ll need.
What Key Person Insurance Doesn’t Cover?
Key person insurance is a life and disability insurance policy. Yet, a key person may choose to voluntarily stop working for a business. If a key person decides to leave for a position at another company, or if they decide to step down from their role to start another venture, a key person insurance policy will not pay a benefit to cover the costs associated with their departure.
Therefore, a company may decide to implement executive compensation strategies that simultaneously increase engagement, productivity, and loyalty of key people thereby reducing the risk of them leaving. These strategies can also be paired with an actual key person insurance policy to incentivise the employee to stay and grow the company while providing cash to the company in the event of their death or disability.
Ultimately, when it comes to protecting a business from a key person voluntarily leaving, it’s imperative for businesses and business leaders to have thorough business continuity, succession planning and exit strategy contingencies in place. This way, the business will be able to prepare for, survive, and mitigate against the loss of a key person no matter how they leave.
The Bottom Line
At Blue Herring, we specialize in business continuity and succession planning. We understand the importance of key person insurance and exit strategies, and we can provide expertise to help you ensure the viability of your company for years to come. Plus, because we’re fully independent, we’re able to ensure optimal, unbiased solutions that fit your particular needs. Contact us today to get started.