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Most businesses employ at least one person who is essential to the company's success.  This person may be a partner, owner, majority stockholder or another individual who is crucial to the business.  If this person unexpectedly leaves the organization, due to death, disability or immediate resignation, it may be hard for the organization to survive.

If your business employs individuals who are vital to its success, key-person life insurance or key-person disability insurance can help protect you from chaos caused by their abrupt absence.  These insurance solutions can give your organization options other than immediate bankruptcy should you lose your key person or people without warning.

Who needs key-person life or disability coverage?  Many organizations can benefit from key-person coverage including those that:
• Have employees who would be extremely difficult, time-consuming or expensive to replace, such as a central decision makers, chief executives, vital sales managers or employees whose ideas have critical commercial impact.

• Employ highly-skilled individuals with unique training.

• Employ people with exclusive ties to key clients.

• Employ leaders with irreplaceable knowledge.

• Would lose considerable business and profit without a certain employee.

• Have narrow profit margins and would be financially distressed in the event of a key staff loss.

• Need to protect their revenue stream from loss (i.e., a hospital protecting against the loss of a high-earning, respected surgeon).

In the event a vital employee becomes disabled or deceased, these types of insurance provide the company with income checks to make up for financial loss or to use for temporary or permanent replacement costs.

Business owners should purchase separate policies for each key employee at the company.

How does key-person disability or life insurance work?:
• Employer purchases life or disability insurance for key individual(s).

• Employer is the beneficiary of the insurance policy.  If the key employee dies, the policy pays out to the employer.

• Tax-free dollars from the policy can be put toward finding, hiring and training a replacement employee, compensation for lost business during the transition and/or financing timely business transactions.

• The policy can be transferred to a departing key employee as a retirement benefit or to a different key person upon the retirement of the original key employee.

• Can be used to buy out the key employee's shares or interest in the business.

• Premiums are based on several factors, including the key employee's age, physical condition, health history and the amount of coverage.

Key-person disability insurance or key-person life insurance?  When most business leaders think of purchasing key-person coverage, they turn to life insurance.  However, industry leaders point out that the chance of losing a key person to disability is 17 times greater than losing that person to death, and the costs of hiring a recruiter to replace a key person and training for a short period of time could be much higher than finding a permanent replacement.

Considerations before purchasing key-person life or disability insurance:
• Estimate the value of your key employees.  Think about the projects that would be lost without these people and the amount of sales that are generated by these people, as well as the cost associated with replacing them.

• Determine if this coverage is necessary, as credit insurance will cover outstanding loans and debts.

• Create a business continuation plan that outlines how your business will function if you lose key employees.

Requirements and coverage options:  To obtain key-person disability or life insurance, the individual must be a consenting employee and you must demonstrate that your organization would incur substantial financial loss without him/her.  To qualify as key person, most insurers require that the employee's salary be in the top 20 percent of the company.  All key-person policies are written specifically for the employee in question. 

To learn about coverage options, limits and other plan details, contact a Bramlett Advisor today at 580-223-7300 or 800-797-3371.



From Benefits Insights brought to you by the insurance professionals at The Bramlett Agency, Zywave, Inc. 2015.  This information is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice.


Posted 1:37 PM  View Comments

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