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Should your company consider key person insurance to protect business continuity?

Should your company consider key person insurance to protect business continuity?

September 19, 2023

What is key person insurance?

Key person insurance — also called key man insurance, key woman insurance, or business life insurance — is, as the last term in the series suggests: a type of life insurance on an essential employee at your company. 

Together with other planning tools like a buy-sell agreement, key person insurance can help your business weather the storm of an untimely death from a key employee whose absence could threaten a company’s continuity — like a founder or top executive.

What is key person insurance used for?

Key person insurance can be used as financial protection while you seek to replace the deceased employee.

In some cases — like a business based off an influencer or celebrity — this key individual cannot be replaced at all. In this case, the key person insurance payout can be used as an alternative to bankruptcy, allowing for a clean business closure: paying off debts, covering severance for remaining employees, paying out shareholders, etc.

Who holds the key person insurance policy?

The company, not the individual, holds the policy and pays premiums on key person insurance. If that individual dies while still an employee, the company receives the policy’s payout. But you can’t just purchase key person insurance policies on your employees without their knowledge; you must get written permission from them first.

Does your business need to purchase key person insurance?

Not every business needs key person insurance. Some questions to ask:

  • Is your business’ operations linked to a single employee’s name or reputation?
  • Could the death of an employee significantly threaten the business’ financial vitality?
  • Do partners in a business want to buy out the shares of a deceased partner if they pass unexpectedly?

In any of these instances, your business should consider purchasing key person insurance.

How much key person insurance coverage do you need?

It depends.

If you are taking out key person insurance on a top sales rep, for instance, whose death could significantly and immediately impact revenue, you may want a policy that provides a large enough payout to provide a financial cushion while you hire their replacement.

On the other hand, if you are the sole owner and employee of a business looking for a policy to cover paying off remaining business debts after your death, your coverage needs will be significantly less than the previous example.

And just like life insurance, how much a policy costs depends on several factors, including: 

  • Coverage amount
  • Employee characteristics (like age and health)
  • Company details (like business structure and industry) 

We recommend comparing different policies to find the right fit for your needs.

Protect your company’s continuity by talking with a Landmark Financial advisor

Proper planning can help your business navigate and survive unexpected crises. Get in touch with us to determine if key person insurance is a wise decision for protecting your company’s continuity.