Key employees are those whose skills and knowledge are significant contributions to overall business income. If a key employee dies or is unable to work anymore, the impact is significant enough that the business will suffer. The financial consequences are undesirable and detrimental. Research shows that many businesses depend on at least one or two key employees for their overall success. However, less than 25 percent of employers have life insurance for their key persons.
Disability income and life insurance for key persons who die or become disabled can provide compensation for a business. The monetary benefits are enough to cushion the adverse financial impact of losing the key person. There is no specific dollar amount that employers should purchase for this type of coverage. However, each employer should consider how much their key persons contribute to the company in order to decide how much coverage to buy. To ensure the proper amount is purchased, it’s best to contact an agent to discuss insurance options. Some insurance companies provide special formulas for calculating this amount. However, it’s important to keep in mind that a calculator is standardized, so it may be better to purchase more than the amount derived from the formula. Only an employer can determine an individual employee’s worth to their company.
In many cases, reviewing the employee’s list of responsibilities can help in the evaluation process. It’s important to consider the cost of replacing a key person. Hiring new employees can be expensive. In addition to this, agency fees, salary and possible moving expenses should be considered for the replacement. While the insured organization pays the premium, is the beneficiary and owns the policy, it’s possible to set up an insurance plan that allows sharing of these responsibilities between the key employee and employer. However, the employee must agree to the company’s purchase of this type of insurance.
Most businesses choose term insurance if their main purpose is getting compensation for losses resulting from the death or disability of a key employee. In some cases, policies that accumulate cash value are appropriate. It’s best to discuss these options with an individual agent. Key person life insurance is more popular than key person disability coverage. However, it’s important to consider the possibility of an employee becoming partially or fully disabled and the effects the disability would have on the financial future of the business. If the key person is a sole proprietor or partner, it may be best to consider a business overhead expense policy for disability coverage. To determine which options are best for an individual company, contact ACBI.