Take a good look at your business. Is there one person—or a few key people—who are invaluable, or whose contributions are so pivotal that without them, your organization could fall apart? The reality is that nothing will compromise your overall financial wellness—or that of your company—like the constant worry of a business collapse if a crucial team member passes away suddenly or is unable to work due to injury. And that’s why having adequate key person insurance coverage is so crucial.
Why? As a business owner, it’s not uncommon to rely on a few key people for the successful operation of your organization. In fact, most businesses are built on the strengths and skills of a handful of individuals whose capital, knowledge or experience makes them valuable assets to its operation. However, while most business owners understand the need to protect their company against unforeseeable risks — such as expenses, business interruptions, liabilities or catastrophic data loss or theft — risks related to human capital within their organization can often go overlooked.
A 2018 survey by the Canadian Federation of Independent Business found that a minority of business owners surveyed (49 per cent) had a business succession plan, with the most oft-cited reasons for their eventual exit being retirement or not having a suitable replacement. An unforeseen (e.g., tragic) event such as the loss of a key person that could force the sale or decline of the business wasn’t cited as a planning consideration.
The loss of a senior decision-maker or a key person in your organization would not only be devastating from an emotional perspective, but likely from an operational and financial perspective, as well. Much like you take out a life insurance policy on your spouse to provide that financial support if one of you were to pass away unexpectedly, key person insurance is designed to do the same for your business. Your corporation’s wellness depends on it.
Moreover, and possibly most importantly, it provides you with peace of mind knowing that you and your business will be protected if the worst should happen.
Insuring the irreplaceable: Who is a key person?
In essence, a key person is an employee, business partner or founder/owner whose knowledge and skills are so valuable that your business could suffer substantially if that person passes away or becomes unable to work due to a disability.
This person’s intellectual capital, skills or talent could be one that few others can duplicate, or the industry in which he or she works (or the nature of their work) may be so specialized that there are few others with the skills to fill that role. What’s more, the unique skills held by a key person may not have been acquired through education or experience, but through their own creativity, talent and interests.
And while a person with this kind of expertise may seem irreplaceable—at least in the near term—having the proper insurance in place will at least afford you and your business the opportunity to move forward in the most efficient and supported way possible.
How to prepare for the unexpected
Even before you determine who this individual (or multiple individuals) is in your business, you can take out a key person insurance policy to mitigate risks stemming from their untimely passing or disablement. Typically, the business is then the owner, premium payer and beneficiary of this key person life insurance policy.
In the event that your business experiences the sudden loss of that employee or key person, the company would receive the life insurance pay out. Proceeds from the policy can provide a portion of the necessary working capital to maintain operations in the near term, absorbing any potential financial blows as you and your team figure out next steps.
Key person life insurance coverage can be used to pay down debt, hire a replacement for that employee, repay investors, or pay other employees in the interim. If necessary, it can also be used to close the business in a timely and efficient manner.
One of the most common reasons a business would obtain this type of coverage is if the leadership team is applying for a loan or financing, and the lender or investor requires key person insurance as collateral. In this instance, the death benefit would typically go to repaying the loan first, and then the business would receive the remainder, if any.
Other reasons could be if you’re the sole proprietor of a small business and want to provide an insurance payout that allows your successors to close the company and pay off any debt, particularly if the company is closely linked to a person’s name, reputation, skillset, or finances; or again, if the loss of the key person would significantly impact the company’s sales or finances.
It’s important to note that the insurance proceeds won’t be available to the deceased individual’s family. Key person insurance isn’t a personal life insurance policy; instead, the company purchases a life insurance policy that will benefit the business entity itself.
Business protection and peace of mind
Similar to life insurance, key person insurance is something you buy and hope to never use. And yet, having it can deliver an invaluable sense of financial wellness to you and your business knowing you’re covered in the event of a worst-case scenario (however unlikely).
To assess whether or not you should take out key person insurance for your business, ask yourself the following questions:
- Would my business be able to run without a specific individual?
- Would the loss of this employee affect the company’s brand or reputation?
- Are there daily tasks tied to this individual? Would these tasks be hard to complete without that person? What about the bigger picture or overall strategy?
- Is key person insurance a prerequisite for business financing?
The Bridgewell Team
To learn more about our key person, life, disability and critical illness insurance, contact a member of our team today.
