Key Person Insurance
Your key people are valuable assets of your company. Like other tangible assets, your business needs to be protected against the loss of their services due to an untimely death or disability.
What Is Key Person Insurance?
Your key employees are valuable assets of your company. Like other tangible assets, your business needs to be protected against the loss of their services due to an untimely death or disability. With key person insurance coverage, the company takes out an insurance policy on a key employee, pays the premiums and is the beneficiary of the policy. If the key person dies unexpectedly, the company receives the policy benefit.1
Why Would a Business Owner Need Key Person Life Insurance?
For closely held businesses, the death of a business owner or other key individual can suddenly leave a company without the expertise or capital it needs to perform day-to-day operations.
Unless they have enough cash to buy the deceased person's shares, the remaining partners or heirs could be forced to sell the business to an outside party that may or may not act in the best interests of the employees and other stakeholders.
The death benefit from a key person life insurance policy helps to provide a vital source of cash that these parties can use to find and hire a suitable replacement.
If the business is highly dependent on a certain person or people, some banks may even require the organization to have such a policy in place before providing a loan. As such, key person insurance may prove valuable even in cases where the individual outlives the term of a policy.
Potential Business Losses
What losses might your business experience with the untimely death of a key person?
Time and dollars needed to find, hire and train a replacement
Reduced company productivity due to other employees being distracted
Lost business opportunities, suppliers and customers
Business Problems to Consider
Your death as owner and key person may create additional problems:
Disagreement among heirs and surviving business owners or key people
Lack of cash to buy the interest of the deceased owner, requiring a sale of the business to an unknown "outside third party"
Surviving owners may be forced to work with someone who not help make the business thrive or the business may have to be sold to pay for expenses.
Determining the Value of a Key Person
There is no easy method for determining the value of a key person. As a business owner, you might use one of three customary methods to estimate the worth of an employee in your company.
Multiple of Compensation - The first method involves annual compensation multiplied by a selected factor determined in part by the difficulty the business will have in replacing the employee. (This method does not work well if the employee is an owner who is being paid only a small salary that does not accurately reflect his or her value to the business.)
Contribution to Profits - In the second method, the company's total excess profit is multiplied by the percentage of the company's profit attributable to the key person, which is then multiplied by the number of years needed to find and train a competent replacement.
Cost of Replacement - The third method totals the direct, out-of-pocket costs involved in finding, hiring and training a replacement, as well as the estimated "loss of opportunity" costs.
Most businesses do not have the necessary funds on hand to meet the unexpected costs related to the loss of a key person. There are three methods commonly used to finance the potential loss of a key person.
Sinking Fund - Money can simply be accumulated in a savings vehicle. However, dollars accumulated for potential losses can also represent lost business opportunities.
Borrowing - This option assumes that the loss of a key person or owner/key person does not seriously damage the company's ability to borrow money. If money is borrowed, it also must be repaid with interest.
Life Insurance- Many business owners choose life insurance to help protect themselves against the loss of a key person. You may find this option to be the most appealing because the insurance premiums are small compared to the lump sum that would have to be quickly available when a death occurs.
Take the Next Step to Help Ensure Your Peace of Mind
As you consider key person insurance, you want to partner with a company recognized for its financial stability. Western & Southern is a Fortune 500 company with a heritage of more 130 years of financial strength that can help you build the financial security of your business. We offer you expertise to determine the right kind of coverage to help protect the future success of your business. A knowledgeable financial representative is available to help you with your key person insurance needs.
Longevity & Stability
1Key Person Insurance provides a death benefit to employers in the event of the death of a key employee to ensure the business can continue. A financial representative can assist with product selection and help to determine the amount(s) needed on each key employee to help ensure business remains operational. Products issued by The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company and other life insurance member companies of Western & Southern Financial Group can help meet these needs.
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