Key Takeaways
- Key Person Coverage protects your business from financial disruption if a critical employee can no longer work.
- This coverage provides liquidity for recruitment, training, debt management or stabilization activities during transitions.
- Any employee whose absence would have a significant impact on revenue, leadership or customer relationships should be evaluated.
- The appropriate benefit amount depends on replacement costs, revenue impact, debt and operational recovery time.
- The best time to obtain coverage is when the company is healthy and key team members are fully insurable.
When you run a business, you get used to wearing many hats. One day you’re managing clients, the next you’re running the business, and more often than not you’re performing tasks that no one else knows how to tackle. But even if you’re used to juggling it all, your business is likely dependent on a small number of people whose absence would cause real disruption.
That is exactly what Key Person Cover protects against.
What is the cover for key persons?
At its core, Coverage of key persons (often called Key Man Insurance or Key Employee Insurance) is life or disability insurance that your company purchases for a specific individual. The company pays the premiums, the company is the beneficiary and the company is the one who receives the benefit if something happens.
Most companies have one or more people who qualify as ‘key’. It could be:
- The founder or CEO
- An excellent performing salesperson
- The person who manages customer relationships
- A partner with technical or own knowledge
- Someone whose leadership keeps the team aligned
The question you need to ask yourself is simple: if this person were suddenly no longer able to work, what would be the financial consequences? If the answer is “significant,” you’re looking at someone who should be covered.
Key Personnel Cover exists to bridge the gap between the loss of that person and the time it takes to replace their skills, stabilize operations or restructure the business. A financial advisor specialized in financial strategies for companies can help you explore key person coverage more deeply.
Why business owners need key person coverage
If you’re like most entrepreneurs, you spend your days thinking about growth. You focus on marketing, operations, cash flow and revenue, which makes it easy to forget that your business is vulnerable in ways that have nothing to do with strategy or market performance.
Losing a key person can immediately disrupt your ability to operate. The effects are immediate. You may lose customers who had a deep relationship with that person. You may have to slow production, postpone important projects, or spend weeks (or months) finding a replacement to fill the role. In the meantime, payroll administration, rent and costs continue.
Key Person Coverage becomes a financial buffer at these times. It saves you time and gives you the tools to make informed decisions instead of staying in crisis mode. And it ultimately ensures that one person’s absence doesn’t jeopardize everything you’ve worked for.
How key person coverage actually works
The structure is quite simple if you break it down into steps. You identify who your key people are, choose the right type of coverage, determine the amount needed and apply for the policy, just as you would with traditional life or disability insurance.
Here’s the kicker: unlike traditional insurance that is tied to the individual, the payout goes to the company and not to the individual’s family. This payout can be used in many ways to keep the company stable, including:
- Covering revenue losses while the business adjusts
- Hiring and training a replacement
- Pay off debts
- Financing of purchase-sale agreements
- Reassuring lenders, investors and sellers
- Providing continuity during leadership transitions
Ultimately, this comes down to protecting your company’s infrastructure from financial shocks and maintaining trust among the people and institutions that support your operations.
How much coverage do you need?
There is no one-size-fits-all number. The right coverage depends on the role, influence, skills and impact on revenue of the key person. When determining the benefit amount, most business owners look at the cost of replacing the person, as well as the costs associated with training new employees and recouping lost revenue from temporary business interruptions. There are also debt obligations to consider, as well as the time it will take to return to normal productivity levels.
You want enough coverage to keep the business running without having to take out expensive loans or make hasty decisions that will negatively impact long-term performance. Key Person Coverage is essentially a liquidity tool: it creates money when you need it most and have the fewest options.
When should you set up this coverage?
There are entrepreneurs who wait too long to protect themselves. They assume they’ll “get into it later,” especially when they’re still growing. But the best time to secure key person cover is when the business is healthy and key employees are insurable.
You should seriously consider getting coverage when:
- Your income is highly dependent on one or two people
- You just hired or promoted someone at the heart of the company
- You secure financing that is dependent on operational stability
- You are preparing for a partnership transition or a buy-sell agreement
- Your business has grown past the point where you could personally absorb the loss
Harnessing stability for growth
When you are scaling a businessDo you think a lot about marketing, staff recruitment and maximizing turnover? But long-term success often depends on how well you manage risk. Ultimately, Key Persons Coverage gives you confidence that your business can survive a major disruption without losing its balance.
It’s one of those precautions you hope you’ll never need, but will be immensely grateful for when the unexpected happens.
Frequently asked questions
1. What exactly is key person cover?
It is an insurance policy that a company takes out for a critical employee, providing benefits to the company if that person is no longer able to work.
2. Who qualifies as a key person in a company?
Founders, executives, top sales talent, technical specialists and anyone whose absence would significantly disrupt business operations are eligible.
3. How does the Key Person Coverage payout help the business?
The payout can finance hiring, training, debt obligations, recovery of lost revenue, buy-sell agreements, or stabilizing day-to-day operations.
4. How Much Coverage Should a Business Owner Buy?
The right amount depends on the impact on sales, replacement costs, training costs, debts and how long the recovery would take.
5. When is the best time to secure key person coverage?
The ideal time is when the company is stable and key employees are insured, especially before financing or major transitions.
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