Key person insurance

Key person insurance helps protects your business should the owner or another key employee pass away.

Why does key person insurance exist?

Often in a small business, one or two people genuinely keep the business running. It may be the owner, founder, or a critical employee. This person is typically so crucial to a business’s function that if they were to (poof!) disappear one day, the business could fall apart.

Key person insurance coverage gives your business a cushion from financial losses should a person’s death happen.

Think of it this way – key person insurance is essentially a life insurance policy, but the beneficiary is your business.

What is the purpose of key person insurance?

Key person insurance is there to ensure your business doesn’t go under without you. If you’re the owner, you’re probably the one who keeps everything together. You know the password for the internet router, are the top salesperson and know details for filing your income tax return.

Without you, the rest of your employees might struggle to continue your business. With the payout from a key person insurance policy, your business could:

• Pay for a temporary worker to do some of your tasks
• Stop working for a week or two while someone else learns how to do your job
• Tie up business ends and close smoothly

The cost of key person coverage

Like any insurance policy, the premium you’ll pay for key person insurance depends on a number of factors. Some of the most important ones are:

• The age, gender and physical health of the person insured — insurers may require an exam before issuing the policy
• The insured’s position and salary
• The size of your business
• The type of business you run
• Whether you buy term key person insurance or a permanent keyman insurance policy — a term policy costs less, and it’s usually all that a small business needs
• How much you want the policy to pay out if the insured key person dies

Of these factors, the only one you can really control is how much you want the policy to pay out. To determine the amount of coverage you need, consider these three questions:

• How much will it cost to replace the employee? Whether that means recruiting and hiring from outside or training a skill set from within, consider the cost and time it’ll take to find a suitable replacement.
• How much revenue do they bring in? While you’re searching, how much business will you be losing? Will clients leave without the key employee around?
• How much do they get paid? Once you know the amount of the first two, you can subtract their pay to get a rough idea of how much coverage you’ll need should the worst come to pass.

Of course, should the worst come to pass, you may decide that your business can’t go on. In this case, key person insurance can help you avoid bankruptcy and be used to pay off debts, distribute money to lenders, give severance benefits to your employees and close your business down in an orderly fashion.

What happens if the insured person quits the business?

So what happens if the insured employee quits the company? There are three common possibilities for a business:

1. They surrender the policy. The business accepts the loss of the money spent on premiums, and surrenders the policy. The insurance company will terminate the coverage and send a check for the policy’s cash surrender value.
2. They sell the policy. Sometimes business owners can sell the key person policy to the key person’s new employer.
3. They arrange a life settlement. The business sells the policy to a third party. It’s probably won’t be as much paid out in premiums, but better than surrendering the policy.

Do you need key person insurance?

Key person insurance is really only for the most critical members of your business — those with specialized knowledge or training, deep connections in your industry or irreplaceable skills.

If you feel your business would come to a stop without a particular employee, it might be worth looking into key person insurance.

Or, If you’re the key person in your business and want your business to outlive you, key person business insurance can ensure your team has the resources to carry on.

On the other hand, if business succession is not a concern or you’re a sole proprietor or run a single-member LLC business without employees, you won’t need key person insurance.

How NEXT supports small businesses

At NEXT, we don’t sell key person insurance, but we think it’s important you have all the information you need to run your business successfully.

That’s because we’re 100% dedicated to small business and want to give you the tools to take yours to the next level.

We encourage you to check out our simple and affordable small business insurance policies.

You can start a quote, customize your options and access your certificate of insurance online immediately — in about 10 minutes.

Start your instant quote today.