Good employees are the foundation of any successful business, big or small because they possess unparalleled expertise. This knowledge makes them difficult to replace and is why your valued team members should be considered assets. This is where employee insurance can come in handy.
WHAT IS KEY EMPLOYEE INSURANCE?
You can define key employee insurance as a coverage policy designed to protect your business from financial losses if one of your key employees dies or becomes disabled. Key employee policies may include disability coverage, life insurance coverage, or both.
Who’s considered a key person?
Generally, a key person is someone that fits these descriptions:
- A specialized skill set, knowledge base critical to business operations
- Someone who developed a significant client that losing would be a risk
- Drives a substantial amount of revenues for the business
- Yes, this could include you as the owner, and your partners
WHY PURCHASE KEY EMPLOYEE INSURANCE?
First and foremost, the business and owner are mutually responsible for paying premiums. So why do it? There are several valid reasons.
1.) Create a smooth the transition to a new employee
If a key employee can no longer have hands-on involvement in the business, this tends to create a void in company profits. Key employee coverage allows you to cover those costs without directly impacting your business’s cash flow. It could also help to make up for any temporary dip in revenue associated with such loss.
2.) Keep your long-term plan intact
Key employees can play an instrumental part in helping to fuel growth and expansion within a small business. Coverage can diminish this loss because it protects against worst-case scenarios.
3.) Provide reassurance to your creditors
For businesses that utilize a vendor line of credit, key employee coverage provides confidence in your ability to maintain the payments or clear the debt altogether, preserving both your reputation with the lenderand your business’s credit rating.
HOW MUCH KEY EMPLOYEE COVERAGE IS NEEDED?
The right amount to put into key employee insurance varies from business to business, but there are some basic criteria all firms can use to evaluate the policy size needed for their company, specifically, replacement costs and compensation.
Ask yourself these questions:
- Replacement costs: How much would it cost you to hire and train someone to replace a key employee? How much revenue might be lost in the interim?
- Business income: How much profitability does the key employee add to your business? Multiply this figure by the number of years it would take for a replacement employee to contribute that same amount.
- Compensation: How much is your key employee earning? Multiply this factor by five or 10 to give you a ballpark idea of how much key employee insurance is necessary.
A trusted financial adviser can assist in exploring your options.