Business Owners Identify Essential Employees, Consider “Key Man” Insurance Coverage

Would your business suffer after the sudden death of an indispensible worker? If so, consider “key person’’ insurance for help financially at a difficult time.

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Among your employees, one or a couple probably stand out. Have you thought about what would happen to your business without these employees?

Consider this situation: You have a technician who handles half of your work and is so good with customers that you have a great deal of repeat business and new business. This technician can handle minor equipment repairs, explain septic system maintenance clearly and can handle the business when you’re sick.

What would happen to your business if this wonderful employee were killed in a auto accident? Obviously you would have to hire a replacement, but it could take a couple of years before the replacement reaches the same level of skill and customer satisfaction. And meanwhile you may lose some business and revenue because you cannot be everywhere. And what about the repairs? You would have the added expense of hiring someone to do those. All of this would cost your company money, which you may not have or would be hard to come by.

CRITICAL WORKERS

How do you protect your business from the consequences? One way is with a particular type of life insurance called “key person” or “key man” insurance. The coverage is intended to help your business survive the transition after the loss of a critical employee.

If you haven’t thought about this, you’re not alone. The National Association of Insurance Commissioners performed a survey a couple of years ago and found that although seven out of 10 businesses said they were very dependent on a few key people, fewer than a quarter of those dependent businesses held policies to compensate for the loss of those employees.

Mike Rice, an agent with the Thomas Ward Insurance Group in Chicago, has an idea about why so few businesses have key person insurance: They’re not thinking very far ahead. It’s understandable because people who have businesses are worried about pressing short-term, day-to-day problems, he says. They have the necessary or required property insurance – on the building and equipment, for example – but there is no protection for a different, more remote threat, he says.

Key person insurance can help by providing the amount of money your business needs to get past the loss of an employee and fully back on its feet. In the event that key person is your business partner, the insurance could provide a sum sufficient for you to buy out your partner’s heirs. To do any of this you must have the consent of your employee, Rice says. It is illegal to take out insurance on people if they don’t know about it.

Premiums for these policies are typically paid by the business taking out the insurance, and the payouts flow to the company. But nothing prevents you from stipulating that part of a payout goes to the lost employee’s survivors. They, too, will have suffered a loss, and their financial condition in the absence of a primary provider may be more stressful than the situation your company is in. Also, a key person policy may be transferred to an employee upon retirement, providing an extra bonus for years of good service to your company.

LENGTH OF TERM

When you consider this type of insurance, you need to determine the length of the policy term. Key person policies may be either term insurance or permanent (also called “whole life” or “universal life” insurance). Permanent insurance remains in force forever. A term policy has a specific end date. The type you choose depends on your circumstances.

If you and your key employee are both young and plan to remain together until you retire, permanent insurance may be the way to go. If your key employee plans to retire in 10 years and move out of state, or if in eight years you feel the business will be strong enough to withstand the loss of the employee, think about a term policy. You could set a goal for the end of a term policy, for example the hiring of a third technician or a second office assistant. The big difference in these policies is cost. Term policies tend to be considerably less expensive than permanent policies.

If you want to pursue this type of insurance, keep a few things in mind:

First, deal with an insurance agent who has experience helping small businesses. What you are able to purchase is governed by the insurance laws of your state, and there is no substitute for a knowledgeable guide who knows what questions you need to answer.

Second, dealing with an independent agent can help. As with any type of insurance, an agent who deals with a variety of underwriters can shop your needs around and get you the best deal. This is especially true in life insurance, where the market is very competitive.

Third, have an idea of what rate class your employee may fit into, for example a non-tobacco user. The rate class will affect the cost of the premium. Potentially dangerous work site tasks, such as confined-space entry or operating heavy machinery, are not hazardous enough to increase the premium, however. You have to be a police officer or firefighter for that to happen.

Fourth, ask about premium discount thresholds. These may make the cost of higher coverage cheaper. For example, you may pay one rate for $450,000 worth of coverage, but if you cross the $500,000 mark, a discount kicks in, lowering premiums below those for the lesser amount of coverage.

AVERT DISASTER

Key person insurance can help your company withstand disaster and perhaps stay in business, and it can do good for the loved ones of the people you depend on. That builds a stronger relationship between your company and your employee, and we all know that businesses thrive on good relationships.



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