Unforeseen expenses can add up quickly and, if not planned for, can leave the business in a precarious or sometimes fatal financial position.
For most businesses, especially at the top level, employees can have a huge impact on the success of the company they work for. These types of individuals are so important that if they were to die unexpectedly, there could be major financial loss or harm to the business as a result. The costs associated with hiring and training someone with like-for-like ability to keep the company alive, or with having to close the company down due to the employee’s demise, could prove to be very expensive.
These unforeseen expenses can add up quickly and, if not planned for, can leave the business in a precarious or sometimes fatal financial position. In addition to what you may have to pay the person you hire, there are associated recruitment costs to consider. These may include:
- Job board and newspaper placements
- Agency fees
- Health screening
- Internal recruiter costs
Furthermore, in the worst-case scenario, if the key person was also the owner of the business and the only employee, it may mean the end of the road for the business – when one person oversees everything, there is no way the business can operate without them. Having some form of succession plan in place would mitigate some of the risk of loss in these scenarios. This is where key person insurance comes into play.
Key person insurance provides peace of mind knowing that, if your most valuable employee(s) were to pass away unexpectedly, there is a financial cushion available to drastically lessen the impact of the loss. The benefits of the policy can go to a family member or a trusted person to keep the business afloat and carry on the legacy even after the owner of the business is deceased. Although they may not necessarily be a like-for-like replacement, the funds available from a key person insurance policy can buy them time and resources to keep things in place while they determine the next course of action.
Key person insurance policies are taken out by the company to cover the life or lives of a top employee or employees (any employee(s) considered critical to the business, really). These policies are sometimes also referred to as business life insurance, but are still subject to the employee’s age, health, lifestyle etc. This may sound similar to a group life policy but, the difference between key person and group life insurance is very clear.
Group life insurance, which is a standard benefit through several establishments, tends to be for an employee’s benefit and can cover a small amount of their liabilities in the worst-case scenario (e.g. a funeral). On the other hand, although key person policies are also taken out with a specific employee in mind, they are designed to mitigate any loss or suffering the company may experience as a result of their death instead. Depending on the way it has been set up, the employee’s family can sometimes benefit, too, but the company always comes first with key person payouts.
At the end of the day, when it comes to protecting your business, proactivity is key. A business contingency plan will promote confidence and peace of mind, which will allow you to move forward with confidence. Confidence will allow you to navigate life and its obstacles successfully – and avoid making desperate decisions when times get rough. The majority of life’s successful people have found ways to create more wins and mitigate as many losses as possible. When it comes to the risk of financial loss or harm to the business due to the sudden death of one of your most valuable human resources, key person insurance could be your mitigation master key.