Protecting your Business from the Loss of a Key Contributor

by | Blog, General Business

Key person insurance can protect against losing a vital employee.
Like many businesses, yours may also rely on someone for the majority of your earnings. This “someone” is often referred to as a key person because his or her knowledge, skillset, or work contribution is considered both highly valuable and necessary to the company’s success. For this reason, it is important for a business to protect itself against the sudden loss of this individual. As a result of being proactive, the business can maintain continuity and cover the costs of hiring temporary help or recruiting a successor, as well as handle any losses that may occur from a decreased ability to conduct business until the successor is trained.

Key person insurance offers protection against the sudden loss of such an individual
In and of itself, key person insurance isn’t a type of insurance policy but is the name given to life insurance that pays upon the death of a specified individual within a company – one who possesses the attributes previously listed. As the owner and beneficiary of the life insurance policy, the company uses the proceeds to help it and its employees survive financially should an unplanned event happen to the insured.

Of course, the main purpose of key person insurance is to provide a benefit to the company upon the loss of the insured. However, a secondary purpose may be to provide the key person with a retirement benefit, such as the cash value of a permanent life insurance policy.

Key person insurance is a business decision that can help protect your business, but depending on the policy selected may also benefit the insured in retirement.

The proceeds from key person insurance can be used to:

• Keep the business running
• Assure creditors everything is fine
• Assure customers the business will run as usual
• Cover the expense of hiring and training a suitable replacement

Determining the right amount of coverage
A key person can be a founder, owner, partner, or employee of a business who possesses specialized skills, credentials or knowledge necessary for the success of a business, whose death may also result in catastrophic financial loss to the business. To determine exactly who is a key person, there are factors a business can use.

For business owners:

• If something happens to this person, the business won’t be able to obtain financial assistance
• The person has special knowledge about the operations and products
• The competition would have an advantage if this person were gone
• The person is the customer relationship maker

For non-business owners:

• The business will not be able to meet sales goals without this person
• The person understands the market and product so well that creativity is easy but would be next to impossible without him or her
• The person has the contacts needed to get results in an emergency situation

The typical rule of thumb for deciding the proper coverage is five- to 10-times the person’s annual compensation. Other considerations include:

• How much it will cost to replace the person (search, hiring, and training)
• How much the person is worth to the bottom line
• If something happens today, what it would cost the business
• How much of the company’s actual loss you are willing to insure

Contact me to see if key person insurance is suitable for your business.

Jodi Perez, CFP®, CEPA®
Financial Advisor, Raymond James
20635 Amberfield Drive, Suite 102
Land O’Lakes, FL 34638

Insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims-paying ability of the insurance company. Any opinions are those of Independent Financial Services and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Independent Financial Services is not a registered broker/dealer and is independent of Raymond James Financial Services.

Written By: Jodi Perez

As a CEPA, Jodi can work with business owners to help develop a team of professionals to create positive change and enable successful exits regardless of the timing.