Key person insurance is an important and often misunderstood form of business insurance. Instead of insurance that protects against sickness, liability, or workers compensation loss, this form of insurance is purchased to compensate a business for  losses that would occur if an important member of the business falls very ill or is otherwise rendered unable to work. Perhaps this employee is an important salesperson, or a manager who is deeply entrenched in day-to-day operations. In other words, this employee is irreplaceable.

So at what point should independent businesses consider key person                             insurance? And how do you specify which employee should have a key                           person policy?

Do You Need Key Person Insurance?

The businesses that are usually susceptible to drastic fallout if a valuable employee becomes unable to work are small to medium sized. In this type of company, it is more likely that employees perform specialized tasks and are perhaps the only person of expertise in their area. If this person is to become disabled or die, an entire segment of your business will screech to a grinding halt. Other companies that may benefit from this type of insurance are companies that are currently in need of securing financing, companies that are still in the start-up phase, and companies that are in niche markets and may have trouble replacing specialized employees. Employees, on the other hand also can protect themselves with total permanent disability insurance (also called TPD insurance), which is a lump sum that is meant to be used to pay off medical cost and debts plus provide an income stream in the event an employee is not able to ever return to work.

To make it more cost effective, you can include key person insurance as part of an employee benefits package. Structuring the insurance package this way means that you can offer part of the proceeds to the employee’s package. This can serve as an incentive for your vital employee to remain with your business. When you are deciding how much to buy your insurance policy for, The National Federation of Independent Business suggests a payout of 8 to 10 times the employee’s current salary. This typically translate to a ballpark amount of $250,000 to $1 million. However, it is important that you don’t overpay, so use a broker that you trust to determine what your policy should be and help you procure a good deal with a carrier. Key person insurance premiums are usually very affordable, especially when you consider the potential for loss.

If you think your business could benefit from key person insurance, the best place to start is with a good broker. The small cost could very well be worth the peace of mind.