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They say it’s impossible to pick a favorite child, right, but how about a favorite employee?
Of course all employees of a company add value to the organization, but let’s face it, there are just some that the company cannot do without. I’m talking about the ones with such a pivotal set of knowledge and skills that if you were to lose them, your business would suffer.
Maybe this is your right-hand man, the powerhouse of your organization's creative ideas, or maybe it’s even you.
At Berry Insurance, we work with several businesses of many industries and sizes. And over the years we’ve helped many of them identify key employees and get the right policies they need to protect them.
So do you have key employees? With September being life insurance month, you may wonder if you need a life insurance policy for them to protect your business. We’ll get into all this and more in the article below.
What is life insurance for key employees?
Also known as key man insurance, key woman insurance, or business life insurance, key employee life insurance is essentially a life insurance policy for a business.
Key employee life insurance is kind of like the personal life insurance you’re probably more familiar with.
With personal life insurance, if the policyholder were to die, their spouse/family/etc. would be paid to relieve the financial burden of their death.
Well key employee insurance is the same concept, except instead of the policyholder’s family being paid, their company of employment would be.
How does key employee life insurance work?
Unlike traditional life insurance where the insured person owns the policy, usually the organization owns the key employee policy.
This means they pay for it, and are also the beneficiary if the key employee ever dies.
But just because the company owns the policy, it doesn’t mean there are key employees out there who don’t realize they are insured on their company's key employee insurance. The employee must agree to the policy before it is purchased. If the company wants key employee insurance for more than one employee, they would need to get two separate policies.
If the employee were to die, the company would be paid the death benefit, up to the policy limits (which we will get into below.)
That money can be used to replace revenue the employee would have generated, or to cover the costs associated with recruiting, hiring, and training a replacement.
If the loss is severe and the company has to close, it can be used to pay off debts and/or employee benefits.
Do I need life insurance for key employees?
Unfortunately, this is a question only you can answer … but we’ll try to offer some guidance.
First of all, do you have any key employees? When trying to identify this, you need to consider two things.
- Do you have any employees who offer so much to your business that the business couldn’t run effectively without them?
- Are these employees’ sets of knowledge and skills so unique or advanced that they couldn’t be replaced or taught before your company suffers?
Consider your company … who keeps it afloat? Is it an even group effort, or are there one or two stand-outs that really make it happen for you? Are there any employees who if you were to lose them tomorrow, your company would financially suffer? Now, would you be unable to replace these roles by either a new hire or existing employee in a timely enough manner for you to not suffer financially?
If the answer is yes, you may want to get key employee life insurance.
Now, was the person that you identified as a key employee you? If you own a small business, we aren’t surprised. In most cases, we see key employee policies for small business owners. Owners of small businesses are usually the piece of the team that knows the in and outs of every aspect of the company. They keep all of the moving parts of the business coordinated and working effectively.
Large businesses may also have a key employee policy for their owners, but that is less common. Generally because larger businesses are more expansive, there are other executive or C-level employees with widespread knowledge who are capable of keeping the company running.
Other than business owners, some other key employees may be:
- CFOs or financial employees
- Other C-level employees
- Top producing sales people
- Employees who create intellectual property
Term vs permanent key man insurance
Like personal life insurance, businesses have a choice between obtaining a term or permanent life insurance policy.
Term insurance provides coverage for a certain time period, often 10 to 30 years, typically for a level premium. If the insured passes away during the term, their beneficiaries receive a death benefit payment, but the policy loses all value once the term ends.
Permanent insurance offers lifetime coverage including both a death benefit, which is the compensation paid to the beneficiary once the insured passes away, and a cash benefit, which is a forced savings available to the insured while he or she is still alive.
In the case of business life insurance, the cash benefit with the permanent policy can be used as a retirement planning for the employee, or could be used as extra cash value for the business for supplemental income needs . Businesses may choose to leverage this as an incentive to the employee while obtaining the life insurance policy.
How much key employee life insurance do I need?
Unfortunately, this is another question that is going to mostly involve your judgement.
Try to evaluate how much revenue this person generates for this company on average. Maybe they’re a salesperson who directly generates revenue. Or maybe they perform some kind of pivotal task that really drives business. Either way, you’ll have to make an educated guess on how much your business could suffer financially if they were gone.
You’ll also want to factor in how long you would expect it to take to replace the person, as well as costs you might incur when replacing the person.
How much does key employee life insurance cost?
The cost of a business life insurance policy will vary based on several factors.
For one, if you know anything about personal life insurance, the age and health of the insured person plays a huge role in determining the cost. Well, this is no different for a key employee policy. You can expect the policy for a young, healthy employee to be much lower than for an older employee with health conditions.
But if your employee is older or less healthy? That doesn’t mean you shouldn’t get a policy for them. Unfortunately, you can’t go back in time and get the policy when your employee was younger, so if you really feel the death of the employee would impact your business, you should still go ahead and buy the policy.
Also, remember those limits we talked about above? Those will also help determine your cost. Of course, the higher limits you choose, the higher your insurance premium would be.
Keep your business running even without your key talent
We know the loss of a key employee seems unimaginable. We hope it never happens to you, and it most likely never will, but if it did, imagine what could happen to your business.
If the death could result in a huge financial loss, or even put you out of business, you probably want to consider key life insurance, which would help you stay afloat until you replaced the role.
For more guidance about your specific company, reach out to your insurance agent.
In addition to helping you cover your key employees, they can also help you thoroughly review all of your commercial insurance policies to make sure you don’t have any gaps in coverage, or aren’t paying more than you need to.
