Key Person Insurance – Pinnacle of Protection

KEY POINTS

Strategic Foundation for Business Continuity

Key person insurance goes beyond conventional coverage, acting as a vital support system. It can provide businesses with collateral, secure favorable credit terms, maintain critical research and development initiatives, and much more.

Vital Role of Key Individuals

Identifying key persons is crucial, whether they are company founders, executives, specialists, rainmakers, or strategic connectors. These individuals drive success, and tailored insurance policies ensure business stability during transitions caused by disability, illness, or death.

Did you know?

Key person insurance can be an integral part of your estate planning process and integrated insurance strategy while providing:

• Business continuity

• Collateral assignment for business loans

• Preferred terms with suppliers

• Funding for research and development

And so much more.

What is a key person?

They are essential individuals whose expertise, leadership, or skills significantly contribute to a business's success. This can include company founders, shareholders, executive officers, key decision makers, and other critical employees vital to the company's operations and profitability.

What is key person insurance?

Key person insurance is a specialized policy that safeguards a business financially in the event of the disability, critical illness, or death of a vital team member. It includes a predetermined payout to cover expenses, ensuring the stability of the business during transitional periods.

Should your company consider key person insurance?

Every company will have its own unique risk management strategy that will dictate its need, if any, for key person insurance. Typically, the following types of companies consider coverage:

Small Businesses and Startups

The day-to-day operations of such businesses can be greatly affected by the sudden absence of a key individual.

Debt Dependent Entities

Key person insurance can serve as valuable collateral for securing debt, as it has the potential to fulfill debt obligations upon receiving a benefit payment from the policy.

Companies in Transition

A change in ownership or leadership may benefit from key person insurance as it can protect against potential disruptions.

R&D Intensive

Companies heavily invested in research and development where key individuals drive innovation.

Does your company have key people?

Ultimately, designating an individual as a key person is a decision specific to each company. Generally, key persons can be identified in the following ways:

Key Decision Makers

Reliance on an individual or core group of key decision makers whose expertise and leadership are vital to the ongoing success of the company.

Skilled Specialists

The loss of employees with specialized skills, technical expertise, and knowledge can simultaneously impact multiple departments within a company.

Rainmaker

A sole individual tasked with nurturing relationships within a significant segment of the sales network, simultaneously contributing a disproportionate share to the overall sales revenues.

Strategic Connectors

Like rainmakers above, some individuals control critical relationships that can be difficult to replace. These relationships may include strategic partnerships, industry influencers, suppliers and vendors, angel investors and venture capitalists, regulators and compliance officers, legal counsel, global networks, technology and innovation partners, and more.

What types of key person insurance policies exist?

There are generally three types of policies.

Life Insurance

Companies often secure life insurance for key individuals to safeguard against financial setbacks resulting from the demise of an employee or executive. If the key person passes away, the policy disburses a death benefit to the company, aiding in covering expenses like recruitment, training, and debt settlement.

Disability Insurance

Disability insurance provides coverage for when a critical employee or executive faces a disabling condition, preventing them from working. The policy provides a benefit to the company, helping mitigate the financial repercussions of the key person's absence by covering costs such as hiring temporary staff, maintaining operations, or supporting the disabled person's recovery.

Critical Illness Insurance

Critical illness insurance provides protection in the event of a key employee or executive being diagnosed with a specified critical illness, such as cancer or heart disease. The policy disburses a lump sum to the company, offering financial assistance for challenges associated with the key person's illness, such as medical expenses, productivity loss, or the need for temporary staffing.

Key Person Insurance vs. Buy Sell Insurance

The world of insurance can be confusing and complex. It is common to mix up the attributes of key person and buy sell insurance policies. The following table is designed to provide clarity and promote sound decision making.

Criteria	Key Person Insurance	Buy Sell Insurance
Purpose	Protect the business from the financial impact of losing a key employee	Protect business owners / partners in case of death or disability
Estate Planning	May contribute to estate planning by ensuring the business has financial stability in the event of a key person’s loss	Can facilitate a structured and planned transfer of business ownership, providing liquidity for estate settlement
Business Ownership Transition	No direct on ownership structure; focuses on the financial stability of the business	Ensures a smooth transition of business ownership
Coverage	Financial loss associated with the death or disability of a key person in the business	Financial interests in the event of the death or disability of an owner / partner
Beneficiaries	The business itself if the beneficiary	Typically, the business or remaining owners / partners
Trigger Events	Death or disability	Death or disability
Funding Source	The business pays the premiums	Business or owners / partners
Employee Retention / Attraction	Helps attract and retain talent by providing financial stability	No direct impact; however, may have indirect impact

FINAL THOUGHTS

Key person insurance stands out as an attractive strategic consideration, ensuring not only business continuity but also bolstering financial stability and fostering growth. Beyond conventional coverage, it acts as collateral, secures supplier terms, and fuels essential research and development.

We have underscored the critical role of identifying key persons – be it founders, executives, specialists, or strategic connectors – with tailored policies addressing diverse business needs.

Offering predetermined payouts for disability, illness, or death, key person insurance can become an indispensable tool for risk management in small businesses, startups, and entities undergoing transitions or engaged in R&D.