November 2011 Key Person Insurance for Your Business
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Key Person Insurance for your Business

By Steve Strauss. ARCHIVE:

Let’s say that your business has several outlets and you have a general manager who is critical to your profitability – someone who is firmly entrenched and important. Someone who is integral and critical to the business. It might even be a top salesperson.

Now, what would happen to your business if that employee were to pass away? If that employee is indeed “key”, that is, he or she creates significant revenue, revenue that would take a while to replace, then their loss would likely trigger an economic crisis in your business.

Enter key person insurance. Think of it as life insurance for your small business.

If you do lose a key employee, the policy will pay you for your lost profits, thereby buying you some time to replace the individual and get things back up to speed.

Key person insurance can also serve as an incentive to retain vital employees. Because you can divvy-up the benefits under the policy any way you wish, you can offer part of any proceeds to the employee’s family. In that manner, key person insurance can become part of your benefits package.

How much should you buy? The typical benefits run between $250,000 and $1 million. There are two ways to determine the right amount of key person insurance to buy. The first rule of thumb is to buy 8-10 times the employee’s salary. A second method is better: Look at the economic value of an employee to your business and ask yourself, “How much money would I lose if something happened to this person?” The answer to that question tells you how much insurance to buy.

I know, you are probably thinking that this all sounds well and good, but buying that much insurance is likely cost-prohibitive. Nope. Rates for key person insurance are dirt cheap right now. In fact, rates are 60% less than they were 10 years ago. Back then, to insure a 40 year-old employee with an average 20 year, term key person policy, it would run you about $995. Today, that same policy would run you  less than $400 a year.

Two more tips: Be sure to buy the right amount. Your broker can also help with this determination. Second, don’t overpay. What you want is a broker that works with multiple carriers and can shop your needs around. That will ensure that you are getting the best deal. What is your most powerful business asset? Most employers say that it is their employees. With key person insurance rates as low as they are these days, it would be shortsighted not to insure your most important business assets.