Unless you’re a sole proprietor, your business probably relies on certain individuals to run it effectively and efficiently. Employees might like to think they are all equally valuable, but certain employees can be more important to a business’s bottom line than others—and without those individuals, the business could suffer. If you are a business owner, you need to evaluate what kind of financial loss would occur if a key employee were to die or become disabled.
In a situation like this, what is known as “key man insurance”—also called “key person coverage,” “key executive coverage,” or “key employee coverage”—can help cover some of the loss. Key man insurance is a life insurance and/or disability insurance policy secured by a business owner for protection in the event of the death or disability of a key employee.
To help determine if you or your business might benefit from key man insurance, ask yourself the following questions:
- Are your key employees involved in sales, management, or administration?
- What kind of annual revenue do they generate?
- How much money would it take to find and train a new person of their caliber?
Benefits of key man insurance
When a key employee, executive, or officer of a company dies or becomes disabled, the business may suffer from the loss of that person’s vital management skills. This could result in a period of lackluster sales and lowered productivity. Key man insurance provides funds to stabilize a company during this transitional period.
Business owners can also use key man insurance to supplement life and disability insurance to protect their business. The business owns and pays for the policy, and it is also the beneficiary, while the employee is the insured. The premium payments are not tax deductible.
Discuss with your agent and your tax advisor the most effective types of life and disability insurance policies based on your business and its relationship with the key employee. The age of your employees and your field of work can affect the strength of the disability policy your business will require.
Your business is your livelihood. Don’t risk the devastating financial ramifications that could happen with the loss of a key employee. Instead, look into spending a small premium for key man insurance that can provide a lump sum of money to help stabilize and save your business if you need it.