If you are a business owner, you may consider key person (or key man as it used to be called) life insurance on your more senior employees.
Why? The intent of this coverage is to minimize the costs to your business should a senior employee pass away unexpectedly.
If you haven’t experienced this yet, then you may wonder what the costs are should such an unfortunate event happen. It turns out, there’s a variety of definable costs that can be incurred in the event of the death of a key employee.
First, recruiting can have significant costs, often subtantial percentages of the key person’s annual income. This alone can cost your company six figures or more.
Next is training costs. Getting a new senior employee up to speed can take six months to a year or longer, and entail a variety of costs. These costs are definable and thus insurable.
Lastly is loss in business revenue. This often comes about for two reasons. First, an immediate drop in sales as the result of no longer having that employee – this can be estimated and replaced with insurance. Secondly is the lost connections and business associations that will have a negative impact on your business revenue likely over a long period of time. Again, this can be estimated and insured.
Adding up those three types of losses will give you an initial estimate as to how much coverage you should consider. In terms of types, a 10 year term life insurance policy is often selected. It’s very inexpensive, and a 10 year timeframe is an eternity in business so it’s often ‘long enough’.
Lastly, if you want to reward your employee, there are insurance strategies where you use the policy as key person insurance initially, then you pass the policy to your employee when they retire. This requires a bit more planning and a consultation with an agent.
If you’d like to discuss key person life insurance on your employees, feel welcome to call our office for a personal consultation.