Key person insurance could save a business if a critical leader dies.
I was talking to a colleague the other day, about the first time I recommended a key person insurance policy and how I tried to sell it to a non-key person.
It was 1991 and I had just been on a course about life insurance and business protection and was visiting a client of the firm I worked for. It was a successful, family owned, manufacturing business in Manchester. I was speaking to one of the family members who was a director, thinking that he must be a key person.
So, I said ‘If something were to happen to you, I am sure it would have a devastating effect on the business’. His response of ‘Erm, actually, the firm would be more profitable as it would no longer be paying me,’ was not what I expected.
Who has the knowledge?
He went on, ‘However, now you mention it, follow me!’ We went along the corridor to the factory floor and he pointed to a man in a white coat and said, ‘ That is our technical manager, if something happens to him we have a huge problem’.
We went back to the office and he brought in the accountant and they discussed the impact the death of ‘Mr. Whitecoat’ would have and estimated it to be around £500,000.
That covered the cost of finding a new employee, training (two years at least) and loss of profits. As I recall the premium for the life policy I arranged for the company was under £100 a month – something the company would not miss.
I Googled the firm as I wrote this and it is still trading. I hope that the policy never had to pay out, but that was surely one of the most inexpensive and important insurance policies that firm ever took out.
What is key person Insurance?
Key person insurance, is a type of life insurance policy that a business takes out on an important or critical employee. The key features of keyperson insurance are:
Purpose:
- Protects a business from the financial loss that would occur if a key employee dies or becomes disabled.
- Ensures the business has funds available to cover expenses, find a replacement, or maintain operations during the transition.
Insured Person:
- The policy insures the life of a key employee who is crucial to the success and profitability of the business.
- This could be the business owner, a top executive, a sales leader, or any other employee with specialized skills or knowledge.
Policy Owner and Beneficiary:
- The business owns the policy and is the beneficiary.
- If the insured key employee dies, the business receives the insurance payout.
Premium Payments:
- The business pays the premiums for the key person insurance policy.
Use of Proceeds:
- The insurance payout can be used to cover expenses like finding and training a replacement, maintaining operations, paying off debts, or providing financial stability during the transition.
- Key person insurance helps protect a business from the potential loss of a critical employee and the associated financial impact. It provides the business with funds to continue operations and mitigate the risks associated with the loss of a key person.
