Most individual business persons seldom think of this concept. This occurs despite the fact most businesses have a very important person that often becomes indispensable. Your business could not operate fully if you lost that key office manager, the over-the-road sales person or the job foreman with the special set of management skills. This person could be that special chef in the kitchen or the person who is a center of influence with your customer base and the face of your business. In simple terms, every investment in a business is an investment in a person.
What would you do without the value such a key person brings to your business? The death of a valued employee could have a fatal impact upon what you do. The loss of an important person to your organization is just like losing a key piece of operational equipment.
It’s not just the output of the person you are losing. There are other considerations as well. Premature death of a highly valued employee could have a significant effect on your credit rating. The loss of the person’s abilities or reputation could cause creditors to question your business financial vitality. Can you continue to pay your debts in the event of the curtailment of revenue? What about the drop in profits after the death of a key individual? There will be increased expense to replace the individual with a less productive person until the training process is completed. The special abilities the former employee possessed may not even be replaceable. All of this hits the bottom line in a negative way.
There are still other factors to consider. This loss could disrupt management, especially if there were expert skills that were lost. The subsequent loss could also cause key customers or employees to lose confidence in the business’ ability to perform into the future. When customers or other employees highly depend on the special skills of an individual they will often lose that confidence, particularly in a down economy.
Life insurance written on this key person does not replace the individual. However, it can replace the revenue lost by the business in the event of their death. It provides cash. Enough cash to keep the firm going in a declining revenue period and a time of increased expenses. It provides cash to continue to pay salaries, bills and suppliers. This will reassure everyone that the business is well capitalized to move ahead through this difficult time. There will be costs to hire a replacement worker and train that individual. The cash from the life insurance will cover these expenses. Cash will be needed for stabilization of the business in a tight economy when revenues are not robust. This cash can strengthen the credit position of the business. This infusion of net working capital cannot be under estimated to a small business dependent on a few key persons.
Key Person life insurance is the writing of a life insurance policy on the life of the key person. This benefit can be funded through permanent or term life insurance. There are reasons and a place for both types of life insurance. Determining the amount of coverage can take several forms. Replacement cost and contributions to earnings are the principal methods to determine coverage amounts. How each business is organized, sole proprietorship, S-Corporation or LLC etc. must also be considered before coverage is to be implemented.
The best advice is to think about this topic in relation to your business. Seek out council from trusted advisors with experience to guide you through the thought process and putting a plan into effect.
If you’re the business owner, this overlooked protection could be your “Key” to great success!