Your business likely already has several types of insurance policies, whether it’s legally required workers’ compensation insurance or product liability insurance to protect your business. But have you considered key person insurance?

By Jenna Cyprus

Key person insurance is a special kind of insurance policy meant to protect your business from the untimely death, disability, or departure of a “key person” within your organization. This is a person central to your organization, whose absence has the potential to derail the company (or at least threaten your stability in the short-term). Your policy would kick in when this individual is no longer able to perform their duties, providing the company with financial resources to keep it going through the inevitable difficulties to follow.

So why would you invest in a policy like this, and who, exactly, is it supposed to cover?

What a Key Person Looks Like

A key person in your business can hypothetically come from any department or any level, but typically falls into one of these categories:

  • Creative geniuses. These are key employees tasked with coming up with new ideas for the company, whether they’re the main visionary for the brand overall, or they’re in charge of research and development. In any case, if they’re out of the picture, the ideas will stop flowing.
  • Technical experts. Experienced technical professionals are notoriously hard to replace. It may be extremely difficult to find someone with the same skillset and experience as your key employee, and even if you do, it will take months to get them up to speed on your projects.
  • Sales virtuosos. Your best sales staff will be similarly hard to replace. Not only are they a major source of new sales and new revenue, they may also be tied to your most important accounts.
  • Charismatic leaders. Entrepreneurs often become the “face” of their company, helping to promote the brand and solidify its identifying characteristics. If that public face (or a similarly charismatic role within your business) disappears, it could weaken your image.
  • Financial anchors. If a partner’s departure would mean the financial insolvency of the business, they’ll be considered a key person as well.

The Benefits of Key Person Insurance

So what are the benefits of a key person insurance policy for this person?

  • Cash to recruit and train a replacement. The payout of the insurance policy will give you enough cash to recruit and train a replacement for the individual you lost. Considering the average cost of replacing an employee is $9,444, and the costs of replacing a key employee are probably much higher, this is incredibly important to your business’s survival.
  • Liquidity protection. The payout should also give you a bit more flexibility with cash flow, which will be more important once your key employee is gone. You may not have access to the same resources or may not be able to maintain the same kind of workflow, so the extra cushion will help see your company through those tough times.
  • Stock buyback potential. Assuming your key employee or partner had a share of your business, the extra cash from the insurance policy will help you ensure you retain control of the company; you can use the money to buy back their shares.
  • Salary continuation for surviving family. You could also use portions of the policy for a salary continuation for the employee’s surviving spouse and/or family, for several months or years after the employee’s untimely death or departure.

In some situations, you may even be able to use your insurance policy as collateral for an SBA loan. This is ideal if you need an extra injection of cash to preserve your business’s momentum.

Key person insurance isn’t right for every employee, or even every business. But it’s certainly worth considering if your business depends on one or more important players for its long-term survival. Because this protection is so flexible, it can help you mitigate—or even neutralize—practically every problem resulting from your key person’s untimely death, injury, or departure. If it’s hard to imagine your business surviving without one or more of your employees or partners, this benefit is too important to ignore.

Jenna Cyprus is a freelance writer from Renton, WA who is particularly interested in travel, nature, and parenting. Follow her on Twitter.

Key man stock photo by PopTika/Shutterstock