7 Reasons Why Keyperson Insurance is Strongly Recommended for Your Business

keyperson insurance

Last week, I wrote about buy-sell insurance because several business owners I talked to didn’t know what it was, let alone have it to protect their business. This week, I’m talking about keyperson insurance. Whereas Buy-Sell insurance uses insurance proceeds to buy out an existing partner’s shares of the company, keyperson insurance is an infusion of cash to help the business weather a financial storm when facing the loss of an essential employee.

What is Keyperson Insurance?

Keyperson insurance, keyman insurance or key employee insurance, as it’s sometimes called, is speciality insurance that protects the business if an essential employee or owner gets sick, disabled or dies. It gives an infusion of cash to the company when it is needed most. If the business did not have keyperson insurance, the business would face potential financial ruin.

Who Needs Keyperson Insurance?

A company should strongly consider keyperson insurance if they have an individual or group of individuals vital to the success and profitability of a business. If something were to happen to these critical employees, the impacted company would have severe financial repercussions.

Do I Need Keyperson Insurance and Buy-Sell Insurance?

Each product has a specific purpose, but the coverage doesn’t need to be mutually exclusive. You can have a policy that fulfils both goals. Buy-Sell insurance buys out existing shareholders’ shares paid for tax-free by the proceeds of an insurance policy. Keyperson insurance is to compensate the business for the death, disability or sickness of a vital employee or owner.

Although the beneficiary is the company, buy-sell insurance ultimately gets paid out to the departed shareholder’s family or estate. The proceeds of keyperson insurance generally stay within the company to ease cashflow concerns so the business can effectively transition through a difficult period.

A Shareholder Agreement or Partnership Agreement generally specifies how the insurance proceeds should be allocated and indicates the direction for the future share distribution.

7 Reasons Why Your Business Needs Keyperson Insurance?

  1. Financial Stability for the Business

If a critical employee dies, becomes disabled or sick, there will be a substantial financial repercussion. It can affect profitability, operations, morale and customer confidence. An influx of cash can be a life saviour to an impacted company. Financial resources can help pay to find a replacement or buy time while the company restructures.

2. Investor Confidence

Suppose your company is seeking third party financing from a private equity firm or a line of credit from the bank. In that case, both may require keyperson insurance to get additional funding.

3. Maintaining Cash Reserves

A stable company that has never had to deal with financial issues in the past may suddenly be hard-pressed to make payroll or pay bills. Generally speaking, if a company loses a person critical to the organization’s financial viability, a financial institution is less inclined to extend credit terms or increase a line of credit. A bank is not your business partner and is only accountable to its shareholders.

4. Maintaining Employee Confidence & Stability

Losing a key employee is tragic to an organization. Employees will quickly take stock after the initial grieving period and determine if their future is in jeopardy. If the company announces that as tragic as the loss was, an insurance policy was in place to protect the company if something like this occurred. Employees will remain loyal just as long as their job security remains intact. If they are communicated that they received a significant influx of cash from insurance, employees’ fears will ease.

5. Protecting an Owner’s Assets

Many business owners must put up personal financial security to get a bank loan or an operating line of credit for their business. In many cases, business owners pledge their homes or investment assets to get financial backing from the bank. If a company doesn’t have keyperson insurance, they run the risk of losing their business, but they also run the risk of losing their homes or other pledged assets.

6. Future Wages for Owners

Business owners face constant uncertainty. The loss of a key employee can not only compromise their business, jeopardize their pledged secured assets, but also, the business represents the owners’ future income. An employee can leave and get another job, but an owner can’t just quit and get another position elsewhere, at least not without severe consequences.

7. Possible Asset Building with Permanent Insurance

When taking out keyperson insurance, you can choose to buy term insurance or permanent insurance. Term insurance is usually the go-to product for keyperson insurance; however, permanent insurance can help you build a significant nest egg within your business. Permanent insurance has a cash value that grows with time. Over several years, permanent insurance can represent a considerable amount of cash within the policy. When the cash value grows in value, the business can borrow against the policy and utilize it as a homegrown line of credit.

No one likes buying insurance, but it’s there for a reason. If you’re stricken with one of those rare catastrophic events, you don’t want your family, business and future decimated because you thought you’d save a few thousand dollars a year. Those isolated and random incidents that occur in life don’t discriminate. The only people who want insurance are those who no longer qualify due to a catastrophic event in their lives. Unfortunately, these people are no longer eligible. Don’t wait to be one of those random victims. You can’t always prevent lives events from occurring, but you can be prepared for them.

If you’re curious to understand more about keyperson insurance and how much it would cost for peace of mind, please don’t hesitate to contact me.

Chris’ Bio

Through the bankruptcy of his first business, a strong balance sheet means nothing unless you can get the money out of your business and into your hands personally, tax efficiently, and creditor protected. Chris helps and coaches business owners to avoid a similar fate as he suffered in his first business.

Through several clever strategies, he illustrates how these little-known vehicles can get money out of your business efficiently, build your corporate brand and create a legacy through charitable means to help make a meaningful difference in the lives of others.

Also, he has seen the impact that mental health can have upon success within your business and your life and how the two are on a constant collision course. When Chris became aware that Entrepreneurs struggled with their mental health at more than twice the rate of average adults, he realized he wasn’t alone and made it his ambition to understand why and do something to help. His business, The Finish Line Group, aims to help support the entrepreneur’s financial, philanthropic, and emotional needs.

Chris’ Why Statement remains, “To openly communicate the lessons learned from my past so that others will thrive in their lives, minimize their setbacks and leave a positive and lasting legacy.”