Most business owners would never think of leaving their building or equipment uninsured. Fire, storms and theft are risks everyone plans for. But there is another risk that often gets overlooked, the sudden loss of a key person on the team, whether through death or a serious long-term absence.
A Risk That Is Often Greater Than Property Loss
Property losses are usually temporary. A damaged building can be repaired or rebuilt, often ending up in better shape than before. Inventory can be reordered. Equipment can be replaced.
Losing a key person is different. Finding, hiring and training a replacement can take months or longer, and in some cases that person's knowledge, relationships or leadership simply cannot be fully replicated.
Statistically, the odds of losing an owner or key employee during their working years are not small, and this risk tends to grow as people get older. It is a risk worth planning for rather than hoping it never happens.
Who Counts as a Key Person
A key person is not always the owner. It could be a sales leader with long standing client relationships, an operations manager who understands the company inside and out, or someone with specialized technical knowledge that keeps the business running smoothly.
Ask yourself a simple question: if this person were suddenly unavailable for an extended period, would it create a real financial strain on the business? If the answer is yes, that person is likely a key employee worth protecting.
How Life Insurance Can Help
No insurance policy can truly replace a talented person. What it can do is provide the business with funds to manage the financial disruption that follows.
Proceeds from a key person policy can help keep day to day operations funded, reassure lenders and vendors that obligations will still be met, maintain customer confidence, and cover the cost of recruiting and training a replacement.
How Key Employee Coverage Generally Works
There is no special legal form required to put key employee coverage in place, though it is common practice for the business's board or ownership to formally approve the arrangement.
Typically, the business itself applies for the policy and is named as the owner and beneficiary. Someone other than the insured employee usually signs the application on behalf of the company.
Premiums are generally paid by the business, and the tax treatment of premiums and any proceeds can vary depending on how the policy is structured. Rules in this area can change, so it is important to confirm current treatment with a qualified tax advisor before setting up a plan.
This article is general information only, not tax, legal or financial advice. Please consult your accountant or attorney regarding how these concepts apply to your specific business.
If your business depends heavily on one or two key people, it may be worth taking a closer look at how prepared you are for an unexpected loss. The team at Flynn Insurance Agency in Kings Park is happy to sit down with you, talk through your situation, and help you understand the options available for protecting what you have built.
This article is general information, not legal, tax or financial advice. Coverage depends on the terms, conditions and exclusions of each policy. Talk with a licensed agent about your situation.
