Key Person Insurance — Protect Yourself, Your Business, and Your Employees

Every small business has employees who are integral to the company's operation. It might be an owner who knows the business literally from the ground up. Perhaps it's the first employee hired who is the only one who meets with your biggest clients. Or it could be the mad genius who keeps your products fresh and popular in a crowded market. 



No matter what role these invaluable individuals play in your small business, it would suffer if anything were to happen to them. How can you help protect the company, your other employees, and yourself? One important tool is known as key person insurance. What is key person insurance? How does it work? And should you carry it? Here are answers to every business owner or manager's questions. 

What Is Key Person Insurance?

Key person insurance is a type of life insurance, which pays out upon the death of the insured party. While most life insurance policies are purchased and the premiums paid for by the insured individual or their family, this policy is bought and maintained by the company they work for. The insured party must agree to the policy, but they are neither the beneficiary nor the one responsible for paying. 

The company can usually buy whole life insurance — which has a cash value and is an asset — or simpler term life insurance for a set number of years. In general, the company can purchase a key person life insurance policy for whatever dollar amount it feels is appropriate. The lump sum is paid to the beneficiary (the company) and used however the beneficiary sees fit. 

Why Get Key Person Insurance?

Imagine what would happen if a certain individual in your company were to have a fatal accident on the way to work. Could the remaining employees continue serving customers in the immediate days and weeks that follow? How would clients be affected? Does anyone in the company have knowledge or skills that no one else possesses? How vital are these to operations? What would it take to replace the person? 

These are tough questions to consider, but they're vital if you want to protect your small business and all your hard work. While most businesses would rightly consider the owner to be a key person, this category often includes general partners, upper management, employees with specific and necessary skills, and anyone whose image or reputation markets the business. 

What Does Key Person Insurance Cover?

Once you identify one or more key persons, it's time to assess what the financial risks are to the company if they were to suddenly pass away. You may need to outsource temporary, immediate assistance to fill in knowledge gaps. This might include hiring an accountant, bookkeeper, manager, tradesman, or business consultant. Other employees may need to work overtime to cover the late employee's role.

If the person is an owner or partner, does the company need to buy out their heirs in order to keep operating? Is there an agreement among partners to do so? If they aren't an owner, who will be involved in finding a suitable replacement? How long might it take, what fees will be charged, and how high would the learning curve be? Could it lead to lower sales or slower delivery of products? 

Finally, could the company even survive as it is? This is an extreme outcome, but employees are protected if there is insurance to pay for layoffs or severance if the business will suffer greatly from a key person's death. 

When Is Key Person Insurance Unnecessary?

As with any insurance policy, the biggest danger is being underinsured and exposed to unnecessary financial risk. However, you can also be over-insured and spend more money than you need to. How can you avoid this? 

The easiest way to over-insure with key person insurance is to cover too many employees. In some ways, many of your employees may seem to be irreplaceable. Honestly assess whether that's really true. Losing a skilled manager would be a hardship, but would it only take a short learning curve before everyone else can compensate for the knowledge loss? Then this may not be the right person to insure. 

In addition, try to accurately estimate what it would take to replace people. If you would have to find a one-in-a-million skill set, the search could be long and expensive. The company has a higher financial risk and should insure for more. However, if the person is the one whose face is on your products, there may be no search for a replacement. The costs would more likely be to adjust your marketing strategy. 

Where Should You Start?

If you rely on anyone within your small company in order to keep it afloat, life insurance may be the safety net that everyone needs. Start by learning more about all your business and life insurance options. 

Illinois Insurance Center can help. We offer an array of business and personal insurance policies so you can customize your coverage to fit your needs. Call today to get answers to your questions or to make an appointment.