Just to clarify, a key employee is someone without whose knowledge and skills would negatively impact your business income and, according to a survey of small businesses by the National Association of Insurance Commissioners, 71 percent of the firms surveyed said they were very dependent on one or two key people for their success. The disturbing fact, however, is that only 22 percent of respondents had key person life insurance in place.
Key Employee Insurance Life or disability income insurance can compensate your business when certain key employees die or become disabled. These coverages cushion some of the adverse financial impact that results from losing a key employee’s participation.
The policy works by paying the business in the event of the death or disability of a person who is so important to the business that their loss could destroy the business. The policy is a cheaper option than standard life or disability policies because the policy can be purchased with a “first to die” provision and cover multiple key employees.
A company founded by three individuals could take out a key policy on all three of the founders with a “first to die” provision. Upon the death or disability of one of these founders, the policy would pay benefits to the company. The policy would no longer apply to the two remaining founders. The policy payment would be used to replace the efforts of the first founder (hiring personnel, covering loss of sales, etc).
The good news is that insurance purchased in this manner would be much cheaper than three individual life policies and three individual disability policies.
The cost of this coverage can often be defrayed as a business expense on company taxes (see your tax professional). The cost is often cheaper because it is sold as a term product usually for fifteen to twenty years and often corresponding to the most productive work years of the employee or officer. Your company may not need this coverage, but even engaging in the analysis of whether this coverage is necessary is often helpful. Do the analysis and consider what you would if Employee X was not able to work tomorrow.