Key Person Insurance and Business Protection
In my years of working, I have come across the line “no one is irreplaceable” and “no one is indispensible”. It means that no one in the company is too valuable to lose. But my experience begs me to disagree. There is always at least one key person whose loss would be absolutely devastating to the business. This could be the business owner or a key executive who has knowledge, experience, judgement, and reputation that has significant impact on the bottom line. That is why taking out key person life insurance on essential employees plays a crucial role in business continuation plans.
Key person insurance is a policy that protects a business in time of crisis. The policy insures the person but the business is the beneficiary. It guarantees resources and cash flow to cover potential loss of income while the company looks for someone to replace the key individual. It also helps the business with repercussions stemming from the loss of the key individual such as creditors pressing for payments or debtors delaying payments.
How Much Key Person Life Insurance Do We Need?
This is the next thing most businesses ask themselves. And unfortunately, the answer is not as simple as the question sounds. There are many factors because you have to compute earnings through detailed calculations. Below are some of the considerations in determining how much a company needs for key person insurance.
- Will the loss of the key person affect cash flow? If the answer is yes, how long is it expected to last? If a key sales individual was suddenly lost, it will undoubtedly have an impact on the inflow of sales. That in turn impacts production and revenue. These are things a company does not plan for, but needs to be ready with at any time.
- Will the loss of the key person affect credit? Losing a key individual will sometimes send suppliers to panic. Credit lines may be reduced, creditors will push for payment, and lending will be compromised. Thinking about these credit considerations is vital to the success of your business.
- Will the business face training and recruiting costs?As difficult it is to think of losing a key person, the fact remains that the individual needs to be replaced. Whether a business looks inside its current pool or looks to hire an outsider, the process will take up delays, time, and reduced efficiency. Knowing the costs these could mean to the company helps paint a better picture of how valuable key person insurance is.