Key Employee Insurance - Do You Need It?

By Compuquotes Team on March 27th, 2008

Business Insurance

Risk planning is one of the newest buzzwords in business. It's all about figuring out the risks that exist for your business, and taking steps to insure against those risks. If there's a risk of fire, you buy property insurance. If your business may be sued, you buy insurance to cover the cost of legal defense and any awards that might be made. There are insurance policies that cover losses from flood, theft, property damage, bad weather - even a poor holiday season. One risk that many business owners fail to consider, though, is the risk that they will lose an employee who is vital to their business.

In many larger companies, the loss of one employee won't damage the firm itself, but when the business is smaller, each person's contributions carry much more weight. What would happen to your business if you or your partner were to fall ill or die? Could the other partner carry on the business alone? What if your general manager of operations - the guy that knows the books inside out and carries the client list in his head - were hit by a car on his way to work this morning? What would it cost to replace that expertise and knowledge?

Many insurers recommend that you guard against this risk by taking out a term life insurance policy owned by the company for each of your key employees. Key Employee Insurance (or Key Man Insurance) pays off benefits to the company if the person insured is permanently disabled or dies during the term covered.

But do you really need Key Man Insurance? Here are some questions to help you figure out whether you need Key Employee insurance, and if so, how much coverage you should pay for.

  • 1.Are there any employees in your company with whom the company could not function?

Don't forget to include yourself in that list. What would happen to your company if you were unable to run it? A key man insurance policy could provide the necessary operating capital to pay out accounts and settle the business.

  • 2.What would it cost to replace that key employee?

Figure up the costs of recruitment for the position, as well as the costs of hiring temp workers or contracting out in the interim while a replacement is sought.

  • 3.What losses would your company incur if you lost a key employee?

There's more to the equation than the cost of replacing your lost employee, though. Other effects may include a temporary decline in income while another person learns the job, additional pay to other employees to take on vital responsibilities temporarily and changes to production and time lines because of the loss of a key planner.

Key Employee insurance offers many other benefits that aren't as obvious on the surface. Among those are:
Borrowing power
Because your business owns the policy, it can be designed to build cash value from which you can borrow or withdraw.

  • Confidence

When you seek financing to expand your business, a key person insurance policy will show lenders that you are managing your assets and risks responsibly.

  • Immediate liquidity

Death benefits will be paid out to your company immediately so that you can recover quickly.

If you haven't considered key person insurance on your most important employees, take the time to evaluate your position and the risks of losing your valued people, then speak to your insurance agent about the kind of coverage you can buy to cover your key employees.

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